Macy’s Earnings a Red Flag for Retail Stocks

However, eternal optimists might see this as a buying opportunity

   
Macy’s Earnings a Red Flag for Retail Stocks

While department store Macy’s (M) started 2013 off strong, its recently reported second-quarter earnings were anything but.

And that should worry investors in the broader sector.

Macy’s earnings grew to 72 cents per share but missed expectations by 6 cents. Revenues actually slipped year-over-year; same-store sales and overall sales both slid just under 1%, despite forecasts of 2.3% growth for each. Macy’s stock, which had climbed 24% year-to-date as of Tuesday’s close, opening 4% in the red this morning in response.

The department store was one of only a handful of retailers that had seen analyst expectations for earnings actually march upward as its report neared — albeit by only a penny in Macy’s case. Thus, not-so-hot numbers from one of the sector’s leaders should be especially worrisome to investors.

Keep in mind that EPS estimates for Walmart (WMT) and Kohl’s (KSS) — which both report tomorrow — have actually been slipping in the last few months. The same is true for big names like Target (TGT) and flailing department store rival JCPenney (JCP) as well.

So sure, some are already anticipating weakness. But the disappointment from Macy’s seems to show that summer spending was even weaker than most had anticipated.

Macy’s said consumers had “continued uncertainty” about buying items they don’t necessarily need, and that the company had to resort to slashing prices. Michael Kors (KORS) and Fossil (FOSL) might beg to disagree with the first half of that sentiment, but the latter half supports the recent bearish call Janney Montgomery Scott analyst Adrienne Tennant made in the face of ongoing deep promotions and a still-weak consumer environment.

The subpar Macy’s earnings also come on the heels of a July retail sales report that, while solid overall, still fell short of expectations. While consumers have weathered headwind after headwind so far this year — from the payroll tax cut to cool weather to continued employment weakness — it seems they might be running out of spending steam.

Of course, longer-term retail bulls might see this blip as a buying opportunity. Macy’s, for example, is currently trading at 10 times forward earnings, despite the fact that its long-term prospects include over 13% annualized five-year growth. If you believe in the department store, now just might be the time to jump in.

The same is (or should be) true for any folks eyeing an entry in Walmart, Target or even more specialized names like Express (EXPR), L Brands (LTD) or Aeropostale (ARO) … because price weakness looks to be just around the corner.

As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities. Follow her on Twitter at @alyssaoursler.


Article printed from InvestorPlace Media, http://investorplace.com/2013/08/macys-earnings-signal-trouble-for-retail-stocks/.

©2014 InvestorPlace Media, LLC

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