Macy's (M 36.88, -4.94, -11.81%) is trading lower despite reporting strong second
quarter results this morning.
Comparable store sales on an owned basis were flat in the quarter, modestly better than estimates. The shift of the Friends & Family promotion to the first quarter was a 240 basis points headwind.
Stepping back, comp sales were up 1.9% in the first half of the year. Same store sales had fallen ~4% in the first half of last year and in the low single digit range for the last three years.
A return to positive comps clearly got investors excited, but the stock opened lower by ~7% in response to earnings on what appears to be mostly a sell-the-news reaction. The stock was up 66% year-to-date.
Second quarter earnings grew 59% to $0.59/share, above estimates. Gross margin of 40.4% was in line with estimates and rose 80 bps year/year. Inventories remain lean and fell 0.5%.
"Macy's, Inc. delivered strong performance in the first half of the year, and we are pleased to report our third consecutive quarter of comparable sales growth. Macy's, Bloomingdale's and Bluemercury all performed well. It is encouraging to see the continued strengthening of our brick & mortar business where we saw trend improvements across the portfolio, led by our Growth50 stores. The combination of healthy stores, robust e-commerce and a great mobile experience is Macy's recipe for success." said Jeff Gennette, Macy's, Inc. chairman and chief executive officer. "We also continue to be disciplined with inventory management, which allows us to give our customers more fashion and freshness, while increasing sales and improving gross margin.
“Our strategic initiatives are gaining traction. They contributed to our first half results and will continue to have a positive impact on our performance in the back half of the year. This, combined with continued strong execution and a healthy consumer spending environment, gives us confidence to raise sales and earnings guidance for fiscal 2018."
Macy's raised fiscal 2019 EPS guidance to $3.95-4.15 from $3.75-3.95 and comp sales guidance to +1.8-2.3% from +0.7-1.8%. Comparable sales guidance for the second half of the year were guided to +2.0-2.5%, which appears to imply some upside to fourth quarter estimates.
July retail sales data is also impacting the sector this morning. Upside to July retail sales was offset by a downward revision to June numbers.
Retail sales grew 6.3% for the three months ending July (which lines up with the fiscal second quarter for retailers). That statistic underpins how strong the consumer is and suggests why we have seen such a dramatic move in the sector this year after the group was left for dead at a multiyear low late last year.
Macy's was the first department store to report quarterly results. We will hear from JCPenney (JCP) and Nordstrom (JWN) tomorrow.
With a $12.2 bln valuation, Macy's trades at 10x EPS earnings and sports a 3.8% dividend yield. The nation's largest department store trades at a notable discount to the average retail stock.
Management provided additional color in a call hosted at 9:30 this morning.
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