Macy's (M) reports third-quarter earnings on Wednesday and has a lot to prove. For Macy's stock to find the momentum that it displayed through the first half of the year, we need to see if the retailer can continue to grind its way back into sales growth. That's not to say it's "do or die" quarter, but there is definitely some urgency now.
The market needs to see if Macy's can keep up what it began in the fourth quarter of 2017. Q2 earnings included a 1.1% decline in net sales year over year, putting a slight damper on the 3.5% net sales gain achieved in this year's first quarter. E-commerce is obviously an area of continued focus for all retailers, but gains in comparable store sales are what will get the stock rolling. Macy's needs to create strength in its brick and mortar stores to win.
With the bankruptcy of Sears (SHLD) and the continued downturn of J.C. Penney (JCP) , Macy's has the opportunity to capture more market share. The question is, will they? Or will names like Amazon (AMZN) take it all? The next few quarters should answer that question. The strengths that Macy's has displayed this year are mostly related to its ability to manage expenses to create earnings. Net sales were up a mere 1.1% for the first half of the year, yet operating income increased 7.9% to $541 million. Lower interest expenses thanks to lower debt allowed income before taxes to increase 21.4% to $380 million. While sales growth might have been slow in the first half of the year, Macy's has done well to derive more value from its revenue. With net income up 61% in the first 26 weeks to $306 million, there's still strength here. Now, they need to show us that comparable store sales can regain traction.
Macy's stock was up 58.9% to $41.82 through the first six months or so of the year. Then a lackluster sales performance in the second quarter cost the stock some value. Partially recovered to over $36, Macy's is still a cheap stock. Trading at less than 10x full year estimates, there's definite value here if Macy's can play its cards right.
We've seen Macy's ability to streamline. Now we need a demonstrated ability to grow, particularly in same-store sales. It's that simple.
If the company reports surprising comp sales gains, this stock should run. Consider the performance we watched through July. From an investment standpoint, Macy's stock has provided comparable performance to Amazon in 2018 -- at a much cheaper price. Year to date, Macy's is up 38.7% vs. Amazon's 39.46% . When you look at the premiums being paid for Amazon stock, I'd say Macy's was the better play.
If we see comparable sales gains tomorrow, I think Macy's will actually outperform Amazon through the end of the year. Investors were not happy with Amazon's uninspired revenue and guidance. So here's an opportunity for Macy's. If Amazon begins to show weakness in guidance, retailers that have taken the proper steps to get back in the game could be in for a strong fourth quarter. If Macy's can show a demonstrated ability to grow sales, it will offer that value. Strength here can carry the stock price into the holiday season.