Will Macy’s Q3 Earnings Add to Investors’ Worries?

Yesterday, Macy’s (M) stock fell 10.9% after department store peer Kohl’s (KSS) announced weak third-quarter results and shared a gloomy outlook. Kohl’s stock was down 19.5% yesterday. This year, Macy’s, Nordstrom (JWN), and Kohl’s stocks have fallen 49.5%, 23.8%, and 29.1%, respectively, while JCPenney stock has risen 2.9%. Department store stocks have underperformed the S&P 500, which has risen 24.5%.

Yesterday, Macy’s stock was also down as the company confirmed that its website had been hacked. Bloomberg reports Macy’s says the data breach occurred in October and impacted a small number of customers.

Macy’s is set to announce its third-quarter results on November 21. Kohl’s and JCPenney’s Q3 results have raised concerns among department store investors. The growing strength of online retailers and off-price retailers such as The TJX Companies (TJX) has hurt department stores.

Macy’s Q2 earnings disappointed

Macy’s disappointed investors by reporting a 60% YoY (year-over-year) decline in its adjusted EPS to $0.28 in the second quarter. The company’s sales fell 0.5% YoY to $5.55 billion. Macy’s missed analysts’ EPS expectation of $0.45 but beat their sales expectation of $5.54 billion. The company’s same-store sales grew 0.3% YoY in the second quarter.

Markdowns to clear slow-moving inventory and costs to support online sales growth impacted Macy’s second-quarter earnings. The company’s gross margin contracted by 160 basis points to 38.8%. Its operating margin narrowed YoY to 2.8% from 5.4%.

Could Macy’s earnings improve in the third quarter?

Analysts expect Macy’s sales to fall 1.5% YoY to $5.32 billion in the third quarter and by 0.5% YoY to $24.8 billion in fiscal 2019. They expect its adjusted EPS to be flat YoY in the third quarter. However, they foresee its adjusted EPS falling by 33.2% YoY to $2.79 in fiscal 2019. Competition could force Macy’s to slash its prices, impacting its third-quarter performance.

Macy’s hasn’t issued guidance for the third quarter. However, in fiscal 2019, the company expects flat net sales and same-store sales growth of 0.0%–1.0% YoY. In fiscal 2019, the company expects adjusted EPS of $2.85–$3.05.

Nordstrom is set to declare its third-quarter results after markets close tomorrow. Analysts expect Nordstrom’s revenue to fall 2.1% YoY to $3.67 billion in the third quarter, and its adjusted EPS to fall 4.5% YoY to $0.64.

In its last reported quarter, Kohl’s sales fell 0.3% YoY to $4.36 billion, while its same-store sales grew 0.4% YoY. JCPenney’s sales fell 10.1% YoY to $2.38 billion, and its same-store sales fell 9.3% YoY. Meanwhile, TJX’s sales grew 6.4% YoY to $10.45 billion. The off-price retailer’s same-store sales grew by 4% YoY. TJX has continued to expand its retail store network, whereas department stores are closing their underperforming stores.

Will M stock recover?

As of yesterday, Macy’s 12-month forward PE ratio was 5.7x. Nordstrom’s and Kohl’s valuation ratios were higher, at 10.5x and 9.3x, respectively.

Macy’s is trying to improve its business by expanding in the off-price space through its Backstage stores. The company operated 219 Macy’s Backstage stores at the end of the second quarter. The company is also focusing on its Bluemercury beauty and spa business. Macy’s operated 187 Bluemercury stores at the end of the second quarter.

The company is also allocating additional resources to its dress, fine jewelry, big ticket, men’s tailored, women’s shoe, and beauty categories. Sales in those categories accounted for 40% of Macy’s overall second-quarter sales. Through its Growth150 strategy, Macy’s is investing in 150 locations to boost its business.

Currently, only one of the 17 analysts covering M stock suggests “buy.” Ten analysts suggest “hold,” and six suggest “sell.” Their average price target of $17.71 implies an 18% upside for Macy’s stock over the next year.