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Macy's Beat on Q3 Earnings, Miss on Sales, Guides Low

After witnessing negative earnings surprises in the first two quarters of fiscal 2015, Macy's Inc.M made a sharp come back in the third quarter delivering better-than-expected bottom-line results. The company posted adjusted earnings of 56 cents a share that beat the Zacks Consensus Estimate by a couple of cents. However, the company failed to restrict the decline in the bottom line that fell 8.2% from the year-ago quarter.

On the other hand, a look at Macy's top-line performance, unveils that this was the eighth straight quarter that the company had posted lower-than-expected sales. This Cincinnati, OH-based company generated net sales of $5,874 million that declined 5.2% year over year and fell short of the Zacks Consensus Estimate of $6,151 million. Comparable sales on an owned plus licensed basis dipped 3.6% while on an owned basis, comparable sales fell 3.9%.

Subdued consumer demand primarily in the apparel and accessory categories, and lower spending by international tourists due to stronger dollar dampened the performance of this Zacks Rank #4 (Sell) company.

Management had earlier highlighted that the company has undertaken initiatives - Macy's Backstage off-price business, the launch of new Plenti loyalty rewards program, the introduction of the new Thalia Sodi private brand, and expansion of Bluemercury - to bring itself back on the growth trajectory. The company has been taking steps such as omnichannel integration, development of online order fulfillment centers, Buy Online Pickup in Store" initiative and bringing in additional markets under the ambit of same-day delivery service.

Moreover, concurrent with the release Macy's also announced that it has entered into a deal with Luxottica Group - the designer, manufacturer and distributor of fashion, luxury and sports eyewear - to open LensCrafters licensed departments in approximately 500 Macy's outlets over three years time frame. In the second quarter, the company had entered into a joint venture with Fung Retailing Limited - one of the leading retailers in Greater China - in an attempt to tap retailing opportunities in the fast-growing Chinese markets.

Coming back to results, gross profit in the quarter declined 3.8% year over year to $2,337 million, however, gross profit margin contracted 60 basis points to 39.8%. Adjusted operating income also fell 12.6% to $369 million, whereas operating margin shriveled 50 basis points to 6.3%.

Store Update

During the quarter, the company opened a new Macy's outlet in Ponce, PR, 5 Macy's Backstage stores in metro New York City, and 10 new Bluemercury freestanding specialty outlets. The company shuttered Macy's stores in Bedford, NH, and Owings Mills, MD. In the final quarter, the company plans to open full-line Bloomingdale's in Honolulu, 3 Bloomingdale's Outlets, and 1 Macy's Backstage. The company in the fourth quarter of fiscal 2015 will close a Macy's store in Los Angeles, CA, and will open a new outlet in the same mall.

Macy's unveiled its plan to shutter 35 to 40 underperforming stores early next year, with an aim to contain costs and focus on developing omnichannel operations.

Other Financial Aspects

Macy's ended the quarter with cash and cash equivalents of $474 million, long-term debt of $7,106 million, and shareholders' equity of $3,975 million.

Macy's has been actively managing its cash flow, returning much of its free cash to shareholders via dividends or share repurchase activity.

During the quarter under review, the company bought back approximately 16.7 million shares for about $900 million. So far in the fiscal year, the company had repurchased approximately 30.6 million shares for about $1.84 billion. As of Oct 31, the company still had $700 million remaining under its share buyback program.

Macy's highlighted that it plans to lower capital spending to less than $1 billion next year from $1.2 billion anticipated for fiscal 2015.

Guidance

Given the soft top-line performance, Macy's lowered its sales outlook for fiscal 2015. The company now expects total sales for the fiscal to decline by 2.7% to 3.1%, down from its previous guidance of a 1% decrease. Comps (owned plus licensed) are now envisioned to decrease in the range of 1.8% to 2.2%, as against flat comps predicted earlier.

For the final quarter, comps on an owned plus licensed basis are expected to decline 2% to 3%. On an owned basis, comps are expected to be roughly 50 basis points below owned plus licensed basis comps for the fourth quarter and fiscal 2015.

For fiscal 2015, management now anticipates earnings in the band of $4.20-$4.30 per share, down from the range of $4.70-$4.80 projected earlier. For the final quarter, earnings are expected to come between $2.54 and $2.64 per share. The current Zacks Consensus Estimate for the final quarter and fiscal 2015 now stand at $2.87 and $4.57 per share, and could witness a downward revision in the coming days.

Other Stocks to Consider

Better-ranked stocks in the retail sector include Columbia Sportswear Company COLM and American Eagle Outfitters, Inc. AEO both sporting a Zacks Rank #1 (Strong Buy), and L Brands, Inc. LB carrying a Zacks Rank #2 (Buy).

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MACYS INC (M): Free Stock Analysis Report

COLUMBIA SPORTS (COLM): Free Stock Analysis Report

AMER EAGLE OUTF (AEO): Free Stock Analysis Report

L BRANDS INC (LB): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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