Macy's, Inc. M has not lost its sheen despite reporting a negative earnings surprise in the third quarter of fiscal 2016. Instead, we note that the stock has increased over 12% since its earnings release. In fact, so far this year, shares of this department store retailer have gained 23.3%, outperforming the Zacks Categorized Retail-Regional Department Stores industry, which showcased an increase of 17.5%. What’s the catalyst behind this? Will the momentum continue in the near future? These questions need an answer. Before we delve deeper, let's take a quick look at the most recent earnings report.
Sneak Peek into Q3 Performance
Macy’s succumbed to a negative earnings surprise after four straight quarters of earnings beat, in the third quarter of 2016. However, net sales came marginally ahead of our expectations. Yet, Macy’s continues to grapple with a dwindling top- and bottom-line performance, as both declined for the third successive quarter this fiscal quarter. Nevertheless, Macy’s reiterated its earnings projection and provided an improved sales guidance for fiscal 2016, as it remains optimistic about the fourth quarter. (Read: Macy's Misses Q3 Earnings Estimates, Retains EPS View)
We believe Macy’s sustained focus on price optimization, inventory management, merchandise planning and private label offering are the primary catalysts, facilitating in meeting customer-oriented demand. In an attempt to improve sales, profitability and cash flows, it has been taking steps such as integration of operations as well as developing eCommerce business and online order fulfillment centers. Further, Macy’s Backstage off-price business, the launch of Plenti loyalty rewards program, the introduction of Thalia Sodi private brand and the expansion of Bluemercury bode well.
Macy's has adopted an extensive restructuring program involving store closures and layoffs. As part of the store rationalization program, it plans to shut down nearly 100 full-line stores to focus on better performing locations and divert savings from these restructuring activities to develop its omni-channel capacities.
Hurdles to Overcome
Macy’s dwindling top- and bottom-line results remain the primary concern for investors. A look at the company’s performance in fiscal 2015 unveils that net sales declined 0.7%, 2.6%, 5.2% and 5.3% in the first, second, third and fourth quarters, respectively. Maintaining the same chronological order, we note that earnings per share fell 6.7%, 20%, 8.2% and 14.3%, respectively. In fiscal 2016, net sales decreased 7.4%, 3.9% and 4.2% in the first, second and third quarters, while earnings per share plunged 28.6%, 15.6% and 69.6% during the respective quarters.
Macy’s operates in the highly competitive retail merchandise sector. We also remain concerned about the company’s low pricing power as against other discount chains, which may in turn hurt the company’s market share.
Movement in Estimates
Following the earnings release this month, an upward trend is witnessed in the Zacks Consensus Estimate for the fourth quarter but a downtrend is being noticed for fiscal 2016 and 2017. In the past 30 days, the Zacks Consensus Estimate of $3.27 and $3.48 for fiscal 2016 and fiscal 2017 has decreased 11 cents and 2 cents, respectively. Over the same time frame, the Zacks Consensus Estimate for the fourth quarter has increased 14 cents to $2.18.
Macy’s currently holds a Zacks Rank #3 (Hold). Better-ranked stocks in the retail sector include Best Buy Co., Inc. BBY and The Children's Place, Inc. PLCE both flaunting a Zacks Rank #1 (Strong Buy), and Domino's Pizza, Inc. DPZ carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Best Buy delivered an average positive earnings surprise of 25.7% in the trailing four quarters and has a long-term earnings growth rate of 11.4%.
The Children's Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.
Domino's Pizza delivered an average positive earnings surprise of 1.4% in the trailing four quarters and has a long-term earnings growth rate of 16.8%.
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