If all one did was look at the bottom line and cash flow statements on the recent earnings release for Macy’s Inc (NYSE:M), you might think things are on an uptick at the department retailer. Even though M stock rose on the report, if you dig into the numbers you’ll see why one must always look at the entire earnings report to get a more complete picture of things.
And things aren’t good at Macy’s.
The bottom line shows that net income rose from $146 million to $222 million, and diluted EPS jumped from $0.46 to $0.73 share. Yet when you look at the top line, you should very quickly become suspicious.
Quarterly net sales fell from $5.63 billion to $5.29 billion, a decline of almost $350 million or about 6%. Yes, some of this was due to store closures. However, it’s always in the comparable store sales numbers where one finds the real story.
The real story for M stock was a comps decline of a very ugly 4%. Positive comps of 3-4% are considered good. A 4% decline is awful.
So did operating and net income rise? You have to look at two things. First, M stock benefitted from a $65 million gain on the sale of real estate. Without that, operating income was only up $56 million and net income was only actually down $29 million.
That’s right, M stock actually had a net income loss backing out that sale.
Then you have to look at SG&A spending. Macy’s stock price appeared to benefit from a $117 million cut in SG&A. That isn’t organic growth in sales. It’s a cut in expenses.
Moreover, while operating cash flow did come in at a solid $389 million, free cash flow was only $30 million. This was an improvement from last year’s negative cash suck of $143 million, at least.
The sad truth is that M stock price is suffering, down almost 70% from its peak, because online competition from Amazon.com, Inc. (NASDAQ:AMZN) and others is impacting the business. People just don’t have much reason to go into stores anymore.
The Bottom Line on M Stock
At first, I thought clothing retailers might not get hurt too badly because people need to try things on to see how it looks on them. However, Macy’s permits free returns.
That means all one has to do is drop an item purchased online back into the box it came in and ship it back for free. Trying things on can be done from the comfort of one’s home, and even worn out a few times.
When it comes to appliances and bedding, there’s simply no need to go into a store, either. You can order everything from your computer. This isn’t going to change.
M stock is supported by its $534 million in cash, yet that cash hoard was $1.3 billion back in January. Long term debt is $6.3 billion and slices $320 million off the bottom line every year. At this point, that $320 million would be all profit.
I do not see any reason to be excited about M stock price going forward. I see no catalyst for growth. I see cash burn. I see online retail killing brick-and-mortar.
Macy’s may sit on lots of real estate, but all that does it provide a cash backup to keep a business alive.
Macy’s has no apparent growth plan or vision. Stay away.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
