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After Macy's (M -12%) rejected an increased takeover bid from Arkhouse Management and Brigade Capital Management last month, investors were frustrated that the department store chain would bet on its "Bold New Chapter" strategy instead of going private. Shares of Macy's gapped lower, sinking to lows on the year. Given the disappointment over Macy's direction, it was pivotal that the company showcase early gains from its strategy. However, Macy's fell short, missing Q2 revenue estimates and posting a -4.0% drop in comparable sales. As a result, the stock is falling towards recent lows on the year.

• For the quarter, revenue fell by 3.8% yr/yr to $4.94 bln. While not an uncommon occurrence, it has been over a year since Macy's came up lighter than expected on its top line. Conversely, EPS toppled consensus, continuing Macy's excellent string of earnings beats.
• Macy's missing sales estimates were not entirely due to internal woes or weak brand recognition. The consumer discretionary environment did not remain as stable as management predicted. As Q2 progressed, the end consumer grew more discriminating, reflecting ongoing macroeconomic uncertainty, i.e., cumulative inflationary pressures, and what Macy's called a complex news cycle -- similar to remarks from Amazon (AMZN) during its JunQ conference call.
• Still, with mass merchants like Walmart (WMT) and Target (TGT), as well as off-price retailer TJX (TJX), delivering outsized performances during JulQ, investors are pinning much of the sales miss on Macy's. These competitors' apparel comps performed well, with TGT boasting a +3% improvement yr/yr and TJX delivering positive apparel sales growth. Given these numbers, we question if consumers are drifting towards mass merchants to consolidate shopping trips and lower-priced firms to find better value amid sticky inflation.
• Looking ahead, conditions are not expected to improve significantly. Macy's anticipates FY25 (Jan) EPS of $2.55-2.90, unchanged from its previous forecast despite the upside delivered in Q2, and revs of $22.1-22.4 bln, slightly lowered from its previous $22.3-22.9 bln outlook. Same-store sales are expected to slip by 0.5-2.0%, trimmed from its prior guidance of down 1.0% to up 1.5%.

There were still some silver linings. Macy's saw green shoots related to its Bold New Chapter strategy, including strength in fragrances and women's ready-to-wear apparel. Customers also responded well to some of the company's private brands, which could prove a revenue and margin boost over time as the current environment continues to trigger value-seeking behavior. Furthermore, Macy's First 50 initiative, where it selected certain stores to test new strategies, achieved its second straight quarter of positive comps, netting +1.0% in the quarter.

Nevertheless, Macy's performance in the quarter was dissatisfactory, especially following its decision to reject an increased takeover offer to go private. We mentioned in July when Arkhouse and Brigade Capital hiked their offer that if Macy's opted to stay public, investors could become impatient if the company's turnaround plan failed to produce material gains over the next couple of quarters. Following a less than stellar Q2 report, there is even more riding on Macy's to deliver meaningful results next quarter.