Though an earnings beat like the kind Macy’s (NYSE:M) printed on Tuesday usually generates buzz, all eyes tend to focus on the forward guidance. Here, the company downgraded expectations for the full year, which ordinarily might sink M stock. However, Wall Street appears to have accepted the reality of the new normal. With eroding consumer sentiment impacting multiple sectors, it’s no longer feasible to hold onto old paradigms.
For the second quarter, Macy’s posted adjusted earnings of $1 a share. Heading into the financial disclosure, covering analysts anticipated earnings of 86 cents. On the top line, the company rang up sales of $5.6 billion. This tally exceeded the consensus target of $5.49 billion by 2%.
However, the eyebrow-raising stemmed from management’s forward expectations. Macy’s lowered full-year guidance, now expecting net sales to range between $24.3 billion to $24.5 billion. Previously, the guidance called for $24.4 billion to $24.7 billion, per Barron’s.
Further, the publication reported that adjusted earnings per share will be between $4 and $4.20. This is down from projections for $4.53 to $4.95.
“The company’s lower outlook for the remainder of the year incorporates the risk it sees in the continued deterioration of consumer discretionary spending in some of its categories and the level of inventory within the industry, as well as risks associated with a more pronounced macro downturn,” Macy’s stated in its press release.
M Stock and the Adjustment to Retail’s New Normal
Significantly, the Wall Street Journal reported that Macy’s cuts to its sales and earnings forecast also account for future markdowns and promotions. Management anticipates these actions are necessary to help rid itself of old inventory.
In addition, Macy’s stated that its new digital marketplace (announced last year) will launch in the coming weeks. This initiative represents alternative avenues to “expand the number of brands it sells without the costs of holding more inventory.”
Further, the WSJ states that the “marketplace will let third-party merchants sell their products on the Macy’s and Bloomingdale’s websites across many categories, including pets, baby and maternity, toys and electronics.” Macy’s follows other big-box retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT), which have had their own third-party marketplaces for years.
For stakeholders of M stock, one of the biggest concerns stemmed from excess inventory. Thus, the one silver lining here is the company’s aggressive approach to combating the situation. Overall inventory in Q2 was elevated but represented a 7% decline from Q1.
Per the WSJ, “customers aren’t trading down to less expensive brands, but are being more selective about what categories they shop and taking advantage of widespread promotions being offered by both Macy’s and its competitors.”
Why It Matters
In late June, hedge fund manager Michael Burry sounded the alarm about the bullwhip effect. Essentially, this circumstance describes the consequences associated with demand forecasts grossly exceeding actual sales. In turn, the other end of the supply chain generates too much product, resulting in excess inventory.
Most prominently, the bullwhip effect impacted big-box retailers. However, M stock has likewise suffered, declining about 27% on a year-to-date basis. Therefore, much rides on the underlying management team righting this beleaguered vessel.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.