Macy’s Inc Stock Surges on Earnings — Enjoy it While it Lasts

The iconic retailer did better than expected, but "better" isn't the same as "good"

By James Brumley, InvestorPlace Feature Writer

In light of the setback J C Penney Company Inc (NYSE:JCP) shares suffered late last month after lowering its full-year earnings forecast against a backdrop of the third-quarter earnings shortcoming from Kohl’s Corporation (NYSE:KSS), it would have been easy to assume the worst for Macy’s Inc (NYSE:M) stock when it reported its Q3 numbers Thursday morning. As it turns out though, the market liked what it heard from the retailer, sending Macy’s stock up almost 8% … one of the third quarter’s earnings season’s most pleasant surprises yet.

Macy's Inc Stock Surges on Earnings -- Enjoy it While it Lasts
Source: Shutterstock

Yet, once the dust settles, there’s a good chance investors will realize Macy’s isn’t out of the proverbial woods yet.

Macy’s Earnings Recap

For its third quarter ending in October, the retailer earned an operating profit of 23 cents per share on sales of $5.28 billion, versus analyst estimates of 19 cents per share on revenue of $5.31 billion. The retailer turned $5.63 billion worth of sales into earnings of 17 cents per share of Macy’s stock in the comparable quarter from a year earlier.

Same-store sales were off to the tune of 4% overall, and lower by 3.6% counting revenue generated by square footage leased by third parties. Experts were only calling for a 2.9% dip in same-store sales. Last quarter marked the 11th straight quarter that same-store sales fell.

CEO Jeff Gennette commented of the Q3 results, “Overall, we’re pleased with the results for the third quarter and we remain on track to meet our full-year sales and earnings guidance for 2017. Importantly, we also saw better gross margin performance primarily due to our tightly controlled inventory position. A highlight of the third quarter was the launch of the new Star Rewards loyalty program — our best customers are responding positively. We also saw continued double-digit growth in digital and are encouraged by the potential of Backstage in Macy’s stores.”

Times Are Still Tough

Despite the mostly disappointing quarter and less-than-thrilling outlook, Macy’s stock jumped sharply on Thursday, with investors convinced the weakness had more to do with mild weather and hurricanes and less to do with the ongoing deterioration of the retail industry.

Not everyone agrees the struggling retailer has turned the corner, however. Jane Hali, head of retail investment research firm Jane Hali & Associates commented “We believe they have not generated enough newness to attract consumers. The continued amount of sales and clearance is still very heavy and is only driving lower income consumers to their stores.”

Though Gennette also touted Macy’s e-commerce success — and expectation for more double-digit growth — Bloomberg Gadfly columnist Sarah Halzack noted “It’s not that Macy’s hasn’t done anything this year to prove its seriousness about e-commerce. It has expanded same-day delivery to 15 additional U.S. markets. But it hasn’t offered a plausible strategy for kicking the online business into a noticeably higher gear. And Macy’s seems to have goals without roadmaps for achieving them.”

Macy’s estimated online sales growth has lagged the broad retail industry’s.

Looking Ahead for Macy’s Stock

Prior to the release of the company’s third quarter earnings report, analysts were calling for a fourth quarter profit of $2.47 per share and sales of $8.52 billion. That top line would be the same as last-year’s all-important fourth quarter revenue tally, while the bottom line would be a marked improvement on the Q4-2016 earnings total of $2.02 per share of M stock.

Those numbers may be adjusted, however, with updated guidance in hand. On a full-year basis, the struggling retailer is now calling for the same sales decline of between 3.2% and 4.3% it had previously offered, translating into a full-year profit of between $3.38 and $3.63 per share. Experts are, or were anyway, modeling an average bottom line of $3.39 per share.

Whatever’s in the cards, while the market saw the glass as half full today, the “could have been worse” thinking won’t play indefinitely.

It’s not clear how much of the company’s Q3 weakness can be attributed to hurricanes and weather, and with, Inc. (NASDAQ:AMZN) still expanding its footprint at a point in time when Macy’s e-commerce machine is increasingly obsolete, Macy’s stock is still one that packs more risk than potential reward, and makes the fourth quarter a must-perform period.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.

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