Macy’s (M) has had remarkably strong run throughout the recovery — just ask J.C. Penney (JCP) or Sears (SHLD) how easy it is to a be a department store company these days — but those days are coming to an end.
Second-quarter sales and earnings were awful when compared with analysts’ estimates. Macy’s blamed it on the strong dollar and West Coast port strike, but one excuse is hard to believe and the other one doesn’t explain future sluggishness.
Sure, a strong dollar hurts sales at Macy’s flagship Bloomingdale’s store in New York City because it’s a tourist mecca. What about the other 884 locations — all of which are in the U.S., Guam or Puerto Rico? (There is a Bloomingdale’s in Dubai operating under a license agreement.)
Multinationals are reeling under the weight of a surging dollar, but Macy’s isn’t a multinational.
As an aside, Macy’s is making moves overseas, but it couldn’t have picked a worse time. The company announced the launch of an e-commerce initiative in China while the country is dramatically devaluing its currency.
To be sure, the West Coast port strike was a blow to the top line, but it’s over now, and Macy’s all but admitted that it won’t catch up from it in the second half of the year. Although M said it expected a better second half, Macy’s still cut its sales forecasts to reflect the poor showing in the first six months of 2015.
Macy’s real problem is what CEO Terry Lundgren mentioned almost as an afterthought in the retailer’s earnings release:
“Moreover, throughout the first half of the year, overall consumer demand has been restrained in many of the categories of merchandise we sell.”
Weak retail spending — and some recent declines in department store spending — have caught up to Macy’s. That’s why sales have dropped in four of the last six quarters.
Don’t Buy the Macy’s Stock Dip Just Yet
What’s worrisome for investors in Macy’s stock is that Wall Street estimates have yet to reflect this new reality. Macy’s has now missed analysts’ average sales estimate for seven consecutive quarters, according to Thomson One Analytics. And earnings per share have come up short for two straight quarters, marking misses on three of the last five quarters.
Additionally, the misses against expectations are getting wider: Macy’s per-share earnings disappointed by 12 cents in the latest period; In the first quarter, EPS fell short by 6 cents.
The result is that although Macy’s stock price tumbled on the earnings news — putting into negative territory for the year-to-date — it could stand to come down more.
On the face of it, the valuation on M stock looks reasonable, with a price-to-earnings multiple of 15 on a 9% long-term growth forecast. The issue, however, is the market has paid a lot less for M stock at a time when Macy’s earnings growth was much stronger.
Investors paid an average of 12 times forward earnings for Macy’s stock over the last five years, according to Thomson Reuters Stock Reports. Over the same span, according to Thomson One Analytics, EPS was growing by an average of almost 20% a year. Analysts estimate Macy’s EPS will grow just 5% this year and 10% next year. In other words, the Macy’s stock price was cheaper when business was better.
Retail spending ain’t great, and the strong-dollar excuse is a canard. None of this necessarily makes Macy’s stock a “sell,” but it’s sure hard to call it anything more than a “hold” at this point.
If you’re looking to pick up some M stock on the cheap, you should wait for Macy’s stock price to come down even more.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
