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Macy's (M) Beats on Q1 Earnings, Lags Revenue, Cuts View

Macy’s Inc. M came up the third straight quarter of positive earnings surprise, as it reported first-quarter fiscal 2016 results. The company posted adjusted earnings of 40 cents a share that beat the Zacks Consensus Estimate of 35 cents. This Cincinnati, OH-based company generated net sales of $5,771 million that fell short of the Zacks Consensus Estimate of $5,955 million.

Management failed to check the decline in the bottom line that fell 28.6% year over year following a 14.3% drop in the preceding quarter. First-quarter earnings were hurt by a 7.4% decline in the top line and subdued margins. Comparable sales (comps) on an owned plus licensed basis declined 5.6% while on an owned basis, comparable sales fell 6.1%.

Macy's pointed that persistent softness in consumer spending levels for apparel and other related categories, lower spending by international tourists due to a stronger dollar and sluggishness seen in some center core categories dampened the performance. These compelled management to cut the forecast for the year. Shares declined 8.7% during pre-market trading hours.

In order to return to the growth trajectory and gain market share Macy’s has undertaken cost containment endeavors, involving headcount reduction and store closures to better withstand competitive pressure from both brick-and-mortar discount stores and online retailers, such as Amazon.com, Inc. AMZN.

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 regain momentum. 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. Macy’s is focusing on the launch of new and innovative products and rollout of in-store pilots of Macy’s Backstage and Bluemercury.

Coming back to results, gross profit in the quarter declined 7.3% year over year to $2,255 million, whereas gross profit margin expanded 10 basis points to 39.1%. Adjusted operating income plunged 29.3% to $289 million, while operating margin shriveled 160 basis points to 5%.

Store Update

During the quarter under review, the company opened seven new freestanding Bluemercury beauty specialty outlets and closed a Macy’s jewelry specialty outlet in Honolulu, HI, the business of which was transferred into the full-line Macy’s store in the same mall.

In fiscal 2016, management plans to open a new Macy’s outlet in Kapolei, HI, and about 42 additional Bluemercury locations (24 freestanding and 18 inside Macy’s), 16 Macy’s Backstage locations (one freestanding and 15 inside Macy’s) and a Bloomingdale’s Outlet store in Orange, CA.

Other Financial Aspects

Macy’s, which carries a Zacks Rank #3 (Hold), ended the quarter with cash and cash equivalents of $734 million, long-term debt of $6,990 million, and shareholders’ equity of $4,148 million, excluding non-controlling interest of $6 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, the company bought back approximately 3 million shares for about $129 million. As of Apr 30, 2016, the company still had $1.9 billion remaining under its share buyback program.

Macy’s board of directors raised the quarterly dividend to 37.75 cents a share from 36 cents. The increased dividend will be paid on Jul 1, 2016, to stockholders on record as of Jun 15, 2016. This is sixth time that the company has hiked its dividend in the past five years.

Guidance

Macy’s, now projects comps on an owned plus licensed basis to decline in the band of 3–4% during fiscal 2016, while on an owned basis, comps are expected to be roughly 50 basis points below. Earlier, the company had forecast comps on an owned plus licensed basis to decline approximately 1%.

Management now envisions fiscal 2016 earnings between $3.15 and $3.40 per share, down from a range of $3.80-$3.90 guided earlier. The current Zacks Consensus Estimate now stands at $3.77, which could witness a downward revision in the coming days.

Other Stocks to Consider

Better-ranked stocks in the retail sector include Abercrombie & Fitch Co. ANF and Wolverine World Wide Inc. WWW both carrying a Zacks Rank #2 (Buy).

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