Why Is Macy's (M) Down 51.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Macy's (NYSE:M). Shares have lost about 51.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Macy's due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Macy’s Q4 Earnings & Revenues Top Estimates, Down Y/Y

Macy’s, Inc. reported better-than-expected fourth-quarter fiscal 2019 results. Management highlighted that a “meaningful sales uptick in the 10 shopping days before Christmas” contributed to the results. This Cincinnati, OH-based company had earlier reported decent holiday sales number that reflected an improvement in trend from the third quarter. Following the results, the company retained fiscal 2020 sales and earnings guidance.

Let’s Delve Deep

Macy’s posted fourth-quarter adjusted earnings of $2.12 per share that surpassed the Zacks Consensus Estimate of $1.95, marking the second straight quarter of beat. The company stated that cost containment endeavors and healthy sales results aided the bottom-line performance. However, the quarterly earnings fell from $2.73 per share reported in the year-ago period.

The department store chain generated net sales of $8,337 million that came ahead of the Zacks Consensus Estimate of $8,324.1 million but decreased 1.4% year over year. Digital sales increased in high-single digits during the quarter under review.

The company stated that comparable sales on an owned plus licensed basis declined 0.5%, while on an owned basis fell 0.6%. Clearly, the rate of decline has decelerated sharply on a sequential basis. We note that comparable sales on an owned plus licensed basis had fallen 3.5%, while on an owned basis, the metric had decreased 3.9% in the third quarter of fiscal 2019.

We note that overall transaction dipped 0.5% compared with the last year. Items per transaction fell 1%. However, average unit retail increased 1.1% during the quarter.

Adjusted EBITDA declined 17.1% to $1,160 million, while adjusted EBITDA margin contracted 260 basis points to 13.9%.

Macy's has been in a spot of bother for quite some time, thanks to soft mall traffic due to increasing online shopping and stiff competition from discount retailers. But these may be things of past, as the company has outlined plans under its three-year Polaris Strategy to adapt better to the new retail ecosystem.

From revamping stores to bringing in loyalty program, from embracing new technologies to investments in merchandising strategies, and from improving websites and mobile apps to supply chain modernization, Macy’s is looking at every nook and cranny to be more agile.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $685 million, long-term debt of $3,621 million, and shareholders’ equity of $6,377 million. Management incurred capital expenditures of $1.16 billion during fiscal 2019, and expect to spend approximately $1 billion in fiscal 2020. The company repaid $597 million of debt in fiscal 2019 versus $1.15 billion in fiscal 2018.

Outlook

Management highlighted that it has not factored in any potential adverse impact from the coronavirus into fiscal 2020 guidance. However, Macy’s did inform that there could be a minor impact on first-quarter sales due to international tourism. It further added that less than 50% of its private brand goods come out of China. Macy’s also informed that first-quarter fiscal 2020 is likely to be challenging from a top and bottom line perspective primarily due to the anticipated disruption from corporate restructuring and campus consolidations as well as cycling off a sturdy first-quarter fiscal 2019.

For fiscal 2020, Macy’s continues to project net sales between $23.6 billion and $23.9 billion compared with $24.6 billion reported in fiscal 2019. Comparable sales on an owned plus licensed basis are expected to decline in the band of 1.5-2.5% during fiscal 2020. Comparable on an owned basis are projected to be roughly 40 basis points better than comparable sales on an owned plus licensed basis. We note that comparable sales on an owned plus licensed basis had slid 0.7%, while on an owned basis, the metric had decreased 0.8% in fiscal 2019.

The company reaffirmed fiscal 2020 adjusted earnings per share (excluding asset sale gains) projection of $2.20-$2.40. This indicates a decline from earnings of $2.91 per share reported in fiscal 2019. Management expects gross margin and SG&A expense rate to be roughly flat year over year.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -249.05% due to these changes.

VGM Scores

At this time, Macy's has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Macy's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.