Macy’s, Inc.: M Stock Earnings Show Turnaround, But Can It Continue?

The writing was on the wall for Macy’s, Inc. (M) in early February after both Kohl’s (KSS) and Ralph Lauren (RL) reported disappointing earnings.

Macy's, Inc.: M Stock Earnings Show Turnaround, But Can It Continue?On Tuesday morning it was Macy’s turn to deliver bad news; and while there were some missteps, investors seem ready to give Macy’s stock a pass and leave its strong 2016 performance intact.

So, here are the Macy’s fourth-quarter earnings numbers you should consider before buying or selling Macy’s stock.

Macy’s Stock: The Rundown on Earnings

Analysts expected adjusted earnings per share of $1.69 on $8.8 billion in revenue. Macy’s delivered $1.73 in adjusted earnings per share on $8.87 billion in revenue, both better than analyst expectations.

That’s the good news.

The downer in Macy’s Q4 report is that same-store sales declined 4.3% on an owned plus licensed basis. The decline was due to warmer weather in the all-important holiday shopping season in November and December, but even here things appear to have turned up in January, as stated by Macy’s CEO Terry Lundgren:

“While 2015 was challenging, our sales trend improved in January as the weather turned colder in northern climate zones and Macy’s and Bloomingdale’s were well-stocked in coats, boots, sweaters, gloves, hats and other seasonal goods. We are encouraged by the way the business responded going into 2016, and we believe we are well positioned to stabilize sales levels this year as we lay the foundation for enhanced shareholder value and sustained, long-term profitable growth.”

In fiscal 2016, it expects same-store sales for both its owned and licensed locations to decline by 1% with EPS of at least $3.80, about the same as its earnings this past year. Leading the charge in 2016 will be its online business, which saw double-digit growth in 2015, and an online store test in China with its Hong Kong-based partner.

Macy’s finished 2015 with EBITDA representing 11.5% of revenue, 250 basis points less than Lundgren’s stated goal of 14%. Macy’s stock currently trades around four times EBITDA. If it were to hit that 14% goal in 2016, its market cap could be 25% higher by this time next year without even reversing its negative same-store sales.

The question isn’t whether it can achieve that goal, but whether or not that will matter to investors.

Bottom Line on M Stock

Macy’s stock performance this year — up 17.4% YTD through Feb. 22 — lies in stark contrast to its abysmal 33.4% decline over the past year, six times worse than the S&P 500. But before you get too upset about Macy’s performance, it’s important to remember that department stores in general have been severely hurting and in need of a fix in recent times.

Even Nordstrom (JWN), the retail industry’s customer service champion, is suffering under a shopper’s malaise as more customers opt for its off-price Nordstrom Rack division forcing it to cut costs, something Macy’s initiated in early January when it announced $400 million in cost cuts.

And then there’s the reality that some retailers are thriving in this environment.

Home Depot (HD) announced Q4 earnings Tuesday morning that were incredibly robust — its domestic stores saw 8.9% same-store sales in the quarter, 360 basis points higher than analyst expectations — and that should get HD stock out of the funk it’s been in so far in 2016, down 7.1% YTD despite all the good news it’s been generating.

The say retail shoppers are a fickle bunch. So, too, it would appear are retail investors. For Macy’s stock, that means it’s at a crossroad: Will it continue rising on Tuesday’s better-than-expected news or will it give back all the gains it’s racked up so far this year?

I believe the former is more likely, but only time will tell.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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