Over the past six months, struggling department store Macy’s Inc. (NYSE:M) has seen its share price make a marked recovery, going from lows of $17.53 per share to within touching distance of $30 per share. That rise has been in large part due to the firm’s turnaround efforts, which appeared to be paying off when M reported stronger-than-expected results for the fourth quarter earlier this year. However, with Macy’s Q1 earnings report due out on Wednesday morning, there’s a lot of pressure for the firm to keep up the positive trajectory.
Can M stock continue its recovery or should investors be preparing for a tumble in 24 hours’ time? Here’s a look at what to expect when Macy’s stock reports.
Earnings Beat or Earnings Flop?
Analysts are expecting the company to report EPS of 40 cents per share on revenue of $5.42 billion and any deviation from those figures will likely cause an initial gap up or down for M stock. However, in recent weeks, analysts have been coming out of the woodwork with pessimistic predictions about the firm’s Q1 performance.
Morgan Stanley recently downgraded Macy’s stock, citing the continuing deterioration of the firm’s core retail business. Analysts at MS said that the firm’s real estate gains have been masking weakness in retail, but that the first quarter is likely to reveal deteriorating return on invested capital and shine a spotlight on the company’s poorly performing retail business.
What About Real Estate?
For that reason, investors will be closely watching Macy’s comments regarding its real estate portfolio. Morgan Stanley claims the real estate gains M stock has enjoyed are coming to an end, but the company might not be quite as tapped out as the note suggested. Macy’s has been selling off some of its properties, and although that certainly doesn’t translate into a long-term recipe for success, the firm still has plenty of assets to keep the funds coming in for the near term.
This year, Macy’s is expected to make a $250 million deal to sell a San Francisco property and the company’s partnership with Brookfield Asset Management Inc (NYSE:BAM) is expected to yield 9 new projects to develop some of the Macy’s existing real estate assets.
During the Q1 call, firm numbers regarding the San Francisco deal as well as more in-depth plans regarding the BAM partnership could prove nay-sayers wrong and suggest that Macy’s real estate portfolio will keep propelling the stock forward for the next few years.
Comps
Whether real estate is a viable source of income over the next few years or not, the real star of Wednesday’s earnings report will be comps. The meat and potatoes of Macy’s success is its retail business, so unless management is able to prove that a lasting turnaround has taken hold, there’s really no long-term story for M stock.
During the fourth quarter Macy’s impressed investors with a 1.4% improvement in same store sales compared to the year-ago quarter. The figure marked the firm’s first positive comps in 11 consecutive quarters and gave investors a reason to believe in the company’s turnaround efforts.
This year, management says it expects to see comps remain in the positive territory somewhere between 0% and 1% for the year. However, comps for the first quarter aren’t expected to dazzle as they did in the first quarter.
The good news is that investors aren’t expecting stellar comps. Poor weather conditions are likely to have hurt same-store sales for the entire sector and management has already warned that the first half of the year won’t be as impressive as the back half. However, poor or negative comps could still wreak havoc on M stock, as it would add fuel to the skepticism surrounding the company’s weakness.
Retail Improvements
Investors will also be looking to hear more about the company’s plans to strengthen its retail business. The firm is due to grow Macy’s Backstage, an off-price label that the company hopes will draw in shoppers looking for a “treasure hunt” experience.
The firm’s online presence will also be in focus as investors continue to worry about threats from e-commerce leader Amazon.com, Inc. (NASDAQ:AMZN). At very least Macy’s will need its e-commerce sales growth show continued growth in order to convince traders that the firm has a fighting chance.
The Bottom Line
Macy’s earnings report will be a highlight of the retail earnings season because the retailer appears to be approaching a do-or-die moment. The first quarter results will give investors a better idea of whether or not the company has been benefitting from its turnaround efforts. The figures that come out on Wednesday are likely to cause big swings for Macy’s stock, the question is which way.
With all the hype that M has enjoyed so far, I’d say the firm is due for a correction — especially with the many factors weighing on its first quarter results. However, if the firm is able to prove the nay-sayers wrong with another impressive quarter, the stock is due for another big leap upward.
As of this writing Laura Hoy was long AMZN.
