Macy’s Stock Rises Despite Falling Sales and Profits: Here’s Why

Tuesday, Macy’s (M -3.94%) reported that sales fell 1% and adjusted earnings per share (EPS) fell 22% year-over-year last quarter. The department store giant also cut its full-year profit forecast, due to the negative impact of high inflation on discretionary demand and a growing glut of inventory across the sector in some categories. merchandise.

Nonetheless, Macy’s stock jumped after the earnings report, ending the day with a 4% gain. In the current economic environment, investors expected even greater pressure on sales and earnings. Macy’s earnings report highlighted how management’s actions to improve the company’s performance are paying off.

A quarter better than expected

While Macy’s sales and profits declined from the second quarter of fiscal 2021, the company benefited from a boom in demand last spring, fueled by government stimulus efforts and the gradual reopening of the economy. As a result, management had expected the company’s financial results to decline last quarter.

In quarterly guidance provided three months ago, Macy’s estimated net sales would decline to between $5.48 billion and $5.55 billion, from $5.65 billion in the second quarter of 2021. It also called to a decline in adjusted EPS from $1.29 a year ago to between $0.84 and $0.94. . On average, analysts expected results to be near the low end of those ranges, with sales of $5.49 billion and adjusted EPS of $0.85.

Instead, Macy’s posted adjusted EPS of $1.00 on net sales of $5.6 billion. So while sales and profits have retreated from 2021 highs, the pullback has been milder than expected.

Notably, Macy’s second-quarter sales remained 1% above the company’s performance in 2019, and adjusted EPS was well above the $0.28 recorded in the second quarter of 2019. Upscale brand Bloomingdale’s boosted revenue growth, recording sales growth of 5.8% in the last quarter, in addition to 11.5%. growth over 2019 in the second quarter of 2021. Aggressive cost-cutting during the pandemic fueled the huge jump in EPS.

Orientation goes down anyway

Even though Macy’s beat its forecast last quarter, the company cut its full-year forecast on Tuesday. The company now expects net sales of $24.34 billion to $24.58 billion this year, down $120 million from its previous forecast. It also reduced its EPS-adjusted guidance range of $4.53-$4.95 to a new range of $4.00-$4.20.

Image source: Macy’s.

Management explained that Macy’s brand sales trends slowed significantly from late June. Additionally, the retailer still has work to do to eliminate aging inventory in “pandemic” merchandise categories like activewear, casual wear and home furnishings.

As such, Macy’s updated guidance assumes weaker sales trends and gross margin pressure from its inventory reduction efforts in the second half of fiscal 2022. It also includes a margin of error additional in case demand trends deteriorate further in the coming months.

Pretty good news

Even after slashing its full-year guidance, Macy’s is on track to generate adjusted EPS well above the $2.91 it posted in 2019, despite lower expected gains on asset sales . This stands in stark contrast to many of its bigger rivals in the department store space.

Looking ahead, it wouldn’t be surprising if some of the current demand and inventory management issues seep into 2023, leading to continued pressure on earnings. On the other hand, the company has a number of initiatives underway to help it stabilize its sales and profits. These include testing new prototype small-format stores, rolling out Toys R Us stores to all Macy’s stores, and launching a new curated e-commerce marketplace.

Even after rising 4% on Tuesday, Macy’s shares are trading less than five times the company’s updated 2022 earnings forecast. That leaves plenty of room for long-term investors if Macy’s can continue to post strong results. above pre-pandemic levels.

Adam Levine-Weinberg owns Macy’s stock and is $15 short in January 2023 on Macy’s, $25 short in January 2023 on Macy’s, and $32 short in January 2023 on Macy’s. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.