Macy’s Lackluster Q2 Hints At Troubled Future For Department Stores


There are earnings misses, and there are big earnings misses, and Macy’s spring quarter results Wednesday (Aug. 14) were far more a case of the latter than the former. Macy’s has spent much of the last five years struggling to adapt its 160-year-old department store model to the digital age — though as of early 2018 there were signs that its investment in pulling off a digital turnaround were starting to take root.

But the year closed on more a whimper than bang, with holiday season sales coming in at weaker than forecast levels, and 2019 started with announcements of more store closures. Things looked a bit better in Q1, with digital sales pulling more weight to counter falling foot traffic in stores, but with the second quarter results in, it seems Macy’s troubles are far from beat back, and apparently growing.

A  Lackluster Earnings Report

While it wouldn’t be quite fair to say Macy’s missed across the board during the spring quarter, it was close enough to start ringing alarm bells among investors and analysts that Macy’s long-term future may be in some serious doubt. Beset by sluggish traffic in stores, slow sales (particularly in apparel) and a quarter that analysts described as “unexpected promotional in nature,”  the second quarter of 2019 was enough of a miss that Macy’s Chairman and CEO Jeff Gennette reserved his statement following the earnings release for explaining the less than inspiring results.

“Rising inventory levels became a challenge based on a combination of factors: a fashion miss in our key women’s sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism,” Gennette said.

The biggest miss, by the numbers, were the earnings figures. Macy’s net income clocked in at $86 million, or 28 cents a share, far below the 45 cents a share analysts were forecasting pre-release and a notably drop-off from the  $166 million, or 53 cents, Macy’s reported a year earlier. The revenue picture wasn’t quite as grim. Net sales came in at $5.546 billion, slightly beating analyst predictions of $5.542 billion, but still a slide from the $5.572 Macy’s reported a year ago.

Looking ahead, Macy’s sees adjusted diluted earnings per share of $2.85 to $3.05, down from its previous outlook of $3.05 to $3.25. Macy’s is still calling for net sales to be about flat for the year, with same-store sales expected to be flat to up 1 percent.

The report was not without bright spots — Macy’s noted that its business posted its fortieth consecutive quarter of double-digit growth (but did not attach a more specific figure to it than that). Macy’s CFO Paula Price also said during the call with analysts following the release that the company's strategic initiatives are “on track to continue delivering sales growth” in the second half.

The trouble, former Toys R Us CEO Gerald Storch told Fox Business' Varney & Co., is that for many players in the department store line, even the good results are still worrisome indicators.

“If you look under the surface, their internet grew double digit, which means their physical stores continue to see this massive bleeding off of traffic and of customers. So as a consequence they kind of held their sales OK, but their margins crashed, their operating profit crashed, their expense rate ballooned. I think there is more of the same coming for department stores.”

It is an opinion that is becoming more common.

The Department Store 2019 Blues

The year 2019 has not exactly been kind to the department store. Last week 100-plus-year-old retail Barneys New York officially filed for Chapter 11 bankruptcy and put it up for sale.

To keep the lights on during the bankruptcy process, the company said it received $75 million in new capital from B. Riley Financial and Brigade Capital Management. The company said that it plans to close stores in Las Vegas, Seattle, Chicago and other smaller places, as well as seven warehouse locations, and focus on key stores, though it hopes to keep its Manhatten flagship open.

Barneys New York Chief Executive Officer Daniella Vitale said board members and company executives “have taken decisive action by entering into a court-supervised process, which will provide the company the necessary tools to conduct a sale process, review our current leases and optimize our operations.”

JCPenney on the other hand, after showing some early signs of a potential turnaround about a year and a half ago, now faces delisting on the New York Stock Exchange due to its low stock price.  JCPenney stocks slipped below the $1 apiece mark in mid-July when reports surfaced that it was working with experts to restructure its debt. JCP had not turned a profit since 2010, and the news spooked investors that a bankruptcy listing was on the way — which led the shares to tank 17 percent in single day trading.

“Given our strong liquidity position we can confirm that we have not hired any advisors to prepare for an in-court restructuring or bankruptcy,” the company said in a statement aimed to ease worries. So far that hasn’t worked; a month later JCP’s stock remains under a dollar and it faces being removed from the stock exchange — though its ultimate fate will be clearer when it reports it second-quarter results on Aug. 15.

Nordstrom, though not quite facing the dire conditions other department stores have stared down in 2019, was unable to take the company private despite avid attempts in 2017-2018, unable to find investors willing to make an $8 billion bet on Nordstrom in specific, or the department store model in general. The stock has lost approximately one-third of its value since that attempt at privatization and in May the retailer reported a big miss on first-quarter earnings. Nordstrom reported revenues of $3.4 billion and earnings per share of 23 cents compared to analyst’s expectations of $3.6 billion and 43 cents.

Now the Nordstrom family is attempting to up its stake of the company over 50 percent, in an attempt to gain greater control (and despite protests from some investors).

“We’re making the changes we believe are necessary to drive our top line,” Nordstrom Co-President Erik Nordstrom said in the company’s last earnings conference call, adding, “our strength is our commitment to the customer.”

It was a message similar to what Macy’s had to say during its earnings conference call. Despite the rough sailing thus far, the company remains “confident” in the changes it is making to ensure Macy’s future, Gennette told investors.

Still, in 2015 Macy’s market capitalization rate was close to $25 billion; as of 2019 it had fallen to a little north of $5 billion. And the stock market has been punishing Wednesday, with Macy’s share dropping 15 percent in value as the earnings news hit the wires.

Macy’s, and the rest of its fellows in the department store line, are running ever lower on customers — which means it might just be the case that they are running out of time to get those turnarounds to take as well.



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