Canary in the Coalmine or So Lonely? I was thinking of the Police this morning when I read Macy's (M) press release. It was a nasty profit warning, but I don't own Macy's shares and have never invested in U.S. brick and mortar retailers. But I read and re-read the release and the commentary from knowledgeable retail analysts to figure out where Macy's numbers are a harbinger of slowing spending habits from the U.S. consumer.
If Macy's was indeed a canary in a coal mine, the late morning rally from the at-the open decline inspired by the drop in M shares should be viewed as a head fake and the market melt-up of the last five days an opportunity to reload short positions. If Macy's is just so lonely because American consumers just cannot be drawn into its big boxes and away from online purchases, than the market is right to discard this news. I don't understand the financial media's fascination with the fate of Sears and JCPenney (JCP) , for example. They have been dead men walking for years.
So, which is it? As always, I went to the numbers to make my decision. One of the reasons I have never invested in retail stocks is the heavy use of buzzwords to obfuscate financial performance as opposed to real metrics that can be used to obtain accurate estimates for cash earnings. So, Macy's management's adjustments of comparable store sales--"comps"--for the extra week of the calendar in 2018 (was this somehow a surprise to them?) and the granularity in performance measurement between stores that are owned versus licensed are just noise to me. I want data I can plug into a model and, refreshingly, Macy's included very relevant numbers in its "revised guidance" table below the comps data.
Annual Gross margin for the period 1/31/2019: today's guidance reads "down slightly" versus the guidance issued on 11/14/2018 for "up slightly." Even without numbers attached that is a huge difference. It shows that Macy's sales growth and inventory turns are slowing and those are terrible trends for a retailer.
SG&A rate. The guidance here is now for "up slightly" versus November's guidance for "flat." This indicates to me that Macy's plans to become increasingly promotional in an effort to convince consumers to buy down their inventories. In fact, Macy's CEO Jeff Gennette mentioned efforts to "attain a clean inventory position for fiscal 2019" in this morning's release. To have annual guidance lowered near the end of the final quarter of that year is an indication of just how bad Christmas was for Macy's.
Annual EPS Guidance. M's guidance for fiscal 2019 earnings now sits at $3.95-$4.10 versus the $4.10-$4.30 given two months ago. That's a ~5% change with nine months already recorded, so, again, Macy's just did not deliver during the holidays.
As for the future I will leave that to the analysts, in this case specifically BofA's team of Heather Balsky and Lorraine Hutchinson. While they cut their estimate for Macy's fiscal 2019 EPS to $3.90, slightly below management's guidance, that pales in comparison to their new estimate for fiscal 2020 earnings for Macy's: $2.88. Wow! BofA analysts are predicting a 26% decline in Macy's earnings next year. That's just mind-boggling and implies to me that M shares are unattractive even at the deflated multiple of 6.4x F2019 EPS the market is according them today.
Macy's stores might seem so lonely because they are magnitudes too large to handle the minuscule foot traffic that they bear, especially in non-holiday periods. The stock market and the S&P 500 has registered a performance of +0.00% today as of this writing--is correct to ignore Macy's earnings. We will have much, much, more important data points coming from other consumer companies in the next few weeks, especially from Amazon on February 7th.
So, the bottom line is that big box retail continues to die its slow death and Macy's results are largely irrelevant to the fate of the U.S economy.