Macy’s (NYSE:M) Q2 earnings miss – guidance cut sends retail sector into tailspin

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Updated: 15.08.2019
  • Department store operator delivers $0.28 Non-GAAP EPS and $5.54B revenue versus $0.45 and $5.55 consensus
  • Lowers full-year profit forecast, guides for $2.85–$3.05 EPS
  • Shares retreat 17%. Other retail and apparel giants pushed into red in trading on Wednesday

The retail sector took a battering on Wednesday after Macy’s Inc. (NYSE:M) revealed that its second-quarter was ‘below expectations’ and guided for more weakness in the coming months, fuelling concerns among interested commentators that the risks of a US recession are growing.

Macy’s posted $0.28 Non-GAAP EPS for the three-month period ending 30th June, which was 17 cents shy of the pre-report estimates ($0.45). Group revenues retreated 0.4% year-over-year to $5.55bn – in line with expectations but not enough to appease investors spooked by the potential for a retail slump.

The weaker numbers sent Macy’s shares into the red to the tune of the 17.3% in early trade, and had the knock-on effect of pushing other major retail chains and apparel manufacturers into negative territory. Guess (-6.5%), Levi Strauss (-4.7%), Abercrombie & Fitch (-5.8%), Gap (-5.7%), Urban Outfitters (-6.4%) and Ralph Lauren (-4.2%) were among those who struggled on Wednesday.

Concerns about the state of retail were also heightened by Macy’s revised full-year profit guidance. After stating that diluted earnings should top out at $3.25 a few months ago, it now expects FY20 EPS to fall somewhere between $2.85–$3.05. That figure does not even take into account the potential for further trade tariffs in the US-China battle, which the company is still actively evaluating.

A few factors that contributed to Macy’s weaker-than-anticipated showing in the second quarter include slower sales of warm weather clothing and an ‘accelerated decline’ in international tourism. An inventory clearance also took a bite out of the bottom line during the latest period.

“We took markdowns to clear the excess Spring inventory and are entering the Fall season with the right inventory to meet anticipated customer demand,” CEO, Jeff Gennette, said in a statement.

He added: “Our 2019 strategic initiatives are on track to contribute to sales growth in the back half of the year, and we have plans to drive productivity and improve gross margins. Our team has responded quickly to the external environment, course corrected when needed and we remain confident.”

Those words of solace did little to boost sentiment on Wednesday though, and the 17.15% drop off in shares meant Macy’s stock declined to its lowest level in a decade and has now retreated 46.2% since 1stJanuary. Shares were changing hands for $16.04 on Wednesday morning.

Analysts will take some time to digest the details of the report this week, but they are unlikely to pivot away from the current ‘Hold’ consensus. Just two analysts have Macy’s at ‘Buy’, while there are ten at ‘Hold’ and three at ‘Sell’. The average price target of $22.80 is on the upside of the current price.