Macy’s (M) released its third-quarter earnings report on Wednesday, following an internal investigation into an employee who concealed up to $151 million in expenses, causing a delay in reporting. The results, largely consistent with the preliminary figures shared last month, painted a tepid picture for the retailer.
Table Content:
Q3 Performance Falls Short
Macy’s reported adjusted earnings per share (EPS) of $0.04, slightly exceeding Wall Street’s forecast of $0.03. However, net sales declined 2.4% year-over-year to $4.74 billion, missing the expected $4.75 billion. Same-store sales also contracted by 1.3%, marginally better than the anticipated -1.39% decline.
Lowered Guidance and Turnaround Challenges
In response to the weak performance and ongoing store closures, Macy’s reduced its full-year profit outlook. The company now anticipates adjusted EPS between $2.25 and $2.50, down from the previous projection of $2.34 to $2.69. This news sent Macy’s stock tumbling 10% in pre-market trading on Wednesday. Year-to-date, the stock has plummeted 25%, significantly underperforming the S&P 500’s 28% gain.
Earlier this year, Macy’s rejected a $24.80 per share buyout offer from Arkhouse and Brigade Capital, choosing instead to pursue its “Bold New Chapter” strategy. However, the underwhelming results have intensified pressure from activist investors.
While same-store sales improved by 1.9% at 50 prioritized locations, the overall outlook remains challenging. Macy’s projects fourth-quarter net sales between $7.8 billion and $8 billion, compared to $8.12 billion in Q4 2023.
CEO Tony Spring acknowledged the “competitive discretionary environment” and the “value-oriented” customer, highlighting the increased focus on clearance items and deals. Unseasonably warm weather also negatively impacted sales of high-margin items like coats.
Q3 Results Summary
Here’s a breakdown of Macy’s third-quarter results against Bloomberg consensus estimates:
- Net sales: $4.74 billion vs. $4.75 billion expected
- Adjusted EPS: $0.04 vs. $0.03 expected
- Same-store sales: -1.3% vs. -1.39% expected
Bloomingdale’s, the luxury chain owned by Macy’s, saw a 1% increase in same-store sales for owned locations, driven by apparel, beauty, and online sales. Blue Mercury, the cosmetics brand, continued its positive trajectory with a 3.3% sales increase, fueled by skincare products.
Updated 2024 Guidance
Macy’s revised its 2024 guidance, forecasting revenue between $22.3 billion and $22.5 billion, up from the previous range of $22.1 billion to $22.4 billion. Same-store sales growth is now expected to be flat to down 1%, an improvement from the earlier projection of a 2% to 5% decline.
Regarding the accounting investigation, sources suggest the employee acted alone and not for personal gain. The individual, no longer with the company, made “erroneous accounting accrual entries” that concealed $151 million in cumulative delivery expenses. Macy’s affirmed that revenue, cash, inventory, and vendor payments were not affected. The company is implementing measures to strengthen controls and prevent future occurrences.
Activist Investor Concerns
Activist investors, including Barington Capital Group and Thor Equities, are pressuring Macy’s to enhance shareholder value. They believe the current share price undervalues the potential of the Macy’s brand and its assets, including Blue Mercury, Bloomingdale’s, and real estate holdings estimated at $5 billion to $9 billion.
Neil Saunders, GlobalData’s managing director of retail, expressed concerns about Macy’s focus on short-term value creation over long-term brand protection. The company plans to accelerate store closures, initiating the first phase of 65 closures this year, exceeding the initially planned 50. A total of 150 locations are slated for closure, with $66 million in asset-sale gains reported in the third quarter.
CFO Adrian Mitchell highlighted the positive progress in “dealmaking,” anticipating approximately $275 million in sales proceeds this year, providing capital for investment and shareholder returns. However, Morningstar analyst David Swartz expressed skepticism about the turnaround strategy, citing previous unsuccessful attempts. He noted that past store closures haven’t yielded significant improvements in same-store sales or other key metrics. Swartz suggested that the activist investors’ demands are already being addressed by Macy’s, and their primary goal might be to gain influence over the board or the company.
