Macy’s Stock Down on Earnings Miss, Declining Sales & Profits in Q2

Macy’s Inc.’s share price is down more than 4 percent in midday trading after a “disappointing” second quarter earnings release in which both revenues and profits slid due to internal and macroeconomic factors, according to the company.

The department-store chain’s earnings as well as its management’s posturing mimic those of the previous quarter during which the firm attributed declines in profits and revenues to lingering West Coast port issues, a stronger dollar and unseasonable weather.

This time around, Macy’s said recurring issues include the ports slowdown and FX pressures while an added drag came from “restrained consumer demand” for many of the company’s merchandise offerings. Comparable sales on an owned-plus-licensed basis were also down by 0.8 percent year-to-date in 2015. On an owned-basis, year-to-date comparable sales declined by 1.4 percent.

Based on the softer-than-expected performance, the company also adjusted down its full-year guidance.

Macy’s chairman and CEO Terry Lundgren said he expects improving trends in the second half based on “a range of promising new strategic initiatives.” Lundgren was referring to the company’s announcement back in January that included a plan to restructure merchandising and marketing functions at Macy’s and Bloomingdale’s consistent with a new “omnichannel approach to retailing” as well as a series of adjustments to its field and store operations.

Macy’s also announced today a joint venture in China and a redevelopment project in downtown Brooklyn.

Net Income: For the second quarter, ended Aug. 1, 2015, Macy’s said its net income was $217 million, a 26 percent decline from the year-ago same quarter when earnings were $292 million.

EPS: Earnings per diluted share were 64 cents, down 16 cents from the same year-ago quarter when earnings per diluted share were 80 cents.

Net Revenue: Net sales declined 3.1 percent to $6.1 billion from the same period last year when earnings were $6.3 billion.

Hit, Miss or Beat: Macy’s missed market watchers’ forecasts for both revenues and EPS in Q2. Analysts polled by Yahoo Finance had predicted EPS of 76 cents and revenues of $6.2 billion.

Executive Insights: CFO Karen Hoguet, during Q2 conference call, on omnichannel: “Our omnichannel strategies are working well as customers increasingly shop and buy across multiple channels. We believe that our new organization structure is helping to accelerate digital growth which continued to be very strong in the quarter … the biggest increases in expense relative to last year related to our growth assessments is our omnichannel strategies, a full quarter of blue market expense and the start-up of expense associated with the backstage pilot.”

Hoguet on China joint venture: “[Macy’s will enter] China through the formation of Macy’s China Limited, a joint venture with Fung Retailing Ltd. The joint venture will be based in Hong Kong and is 65 percent owned by us and 35 percent by Fung Retailing. [It] will start with an e-commerce pilot initiative on T-Mall Global later this fall … No physical stores are planned for China at this time, but may be considered in the future based on experience in e-commerce … we are expected to invest approximately $25 million in these operations over the next 18 months and our share will  be 65 percent of that.”

Hoguet on re-creating Macy’s Brooklyn store: “Our strategy has been to maintain a mix of both owned and leased stores, and this approach has worked extremely well for us, keeping our costs low and providing us with the flexibility to adapt to changing economic conditions. As part of this strategy, we continuously review our portfolio and take action where we see opportunity to enhance value. In this case, we were able to monetize part of what we owned in Brooklyn — and frankly, weren’t using productively — while creating what we expect to be a stronger, more productive retail store in this terrific market.”

Looking Ahead: Based on weaker-than-expected sales performance in the first half, the company is reducing its full-year 2015 guidance for comparable sales on an owned-plus-licensed basis to be approximately flat, compared with previous guidance for growth of approximately 2 percent. Comparable sales on an owned-basis will be approximately 50 basis points lower than on an owned-plus-licensed basis. The company expects total sales to be down by approximately 1 percent in 2015, compared to previous guidance for total sales growth of approximately 1 percent.

The company is maintaining its guidance for 2015 earnings per diluted share to be in the range of $4.70 to $4.80.

Analyst Insights: “Little hope for a near-term same-store-sales improvement; but a reminder of a long real estate road ahead.” –Michael Binetti, UBS Investment Bank analyst, Aug.12 note.

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