Why Macy’s Spooks Investors

The news flashed shortly after 8 a.m. on Wednesday, August 14, that Macy’s earned $0.28 in the second quarter 2019. That was $0.17 below street expectations. Macy’s stock plunged. Maybe most of the street had not been watching Macy’s advertising, which screamed sale. That was a clear sign of what to expect. Most of the other retailers’ stock prices were also hurt by the announcement, despite the fact they will not report sales until later this month. This huge miss clearly spooked the market.

Macy’s blames the shortfall of earnings on a miss in key sportswear private brands and an accelerated decline in international tourism. While I believe that a buyer could have gone wrong, I cannot accept that all private brands went off the cliff at the same time. My view is that the intense heat and erratic weather patterns this summer slowed sales since customers did not shop as much. More aggressive markdowns should have been taken. I think that the clearance sales that were offered were repetitive and dull. The lack of tourist business affected sales at Bloomingdale’s sharply.

I am also distressed that the Macy’s management has placed so much emphasis on Story, now featuring outdoor merchandise with the help of Dick’s Sporting Goods, and on Thredup, a resale merchandise effort that has about 500 square feet in 40 stores. These are two new programs that Macy’s has initiated. In addition, there will be a new subscription rental service called My List at Bloomingdale’s; it is a take off on Rent the Runway.

These new programs are supposed to represent innovation across the company, but they don’t seem truly break-through. In fact, Fast Company’s first annual “Best Workplace for Innovation” lists only Amazon and Sephora as places that empower all employees, create new products, improve operations and take risks. Only two companies were listed – not a single department store. Macy’s should start reading the tea leaves; innovation is a total commitment to change the world, not by taking small baby steps in order to avoid risk.

The company is talking about improved results in coming months. It expects to have e-commerce revenues of approximately $1.5 billion by the end of the fiscal year, expecting strong fourth quarter sales. Management is proud to have had double digit internet sales increases for the last 40 quarters. Management is also looking forward to improved fashion sales in the fourth quarter of this year, expecting sales momentum to accelerate in leading classifications. The third quarter will be less robust. For the full year, management has reduced estimates from $3.05 to $3.25 to $2.85 to $3.05                                  

Merchandising earnings in the quarter (without real estate sales) were $0.27, compared to $0.59 last year. For the first half of the year, the merchandising earnings without real estate were $0.61 compared to $1.02 last year. Total sales in the quarter were $5.55 billion compared to $5.57 billion in the previous year. Fully diluted earnings per share were $0.28, down significantly from $0.70 a year ago. Management was pleased that comparable sales grew 0.3% (including licensed sales). I was not.

I was the senior retail analyst at Morgan Stanley for 16 years, following a 20 year career at retailers including Macy’s, May Department Stores and Allied Stores. Curren...