I really am rooting for Macy's (M) . That makes it just the more difficult to point out the weakness in the company's fourth quarter results. While they did beat estimates, sales revenues are down. Operating income is down. Earnings are down, a large portion of which stemmed from asset sales. Frankly, there's a lot to frown at but the earnings beat. As we get further into 2019, I think markets might be a little more critical. Because of the low valued nature of Macy's stock, I view the company as a "Hold".
I'm not impressed by sales beats if the sales still decline. Macy's reported revenues of $8.46 billion, beating estimates of $8.45 billion. That's not much of a beat. The company reported comparable store sales gains of 0.7% if you include licensed stores. Yet this revenue represented a decline year over year of 2.4%. That's a bad thing during the coveted holiday season. Lower costs and gains on the sale of real estate were not enough to buck the sales decline. Operating income declined 15.7% to $1.05 billion. I'm big on operating income. I consider it one of the most important indicators of a strong performing company. A revenue decline that is coupled with a strong increase in operating margins can be a good thing, as the company might be creating a smaller yet more efficient revenue stream that translates to earnings. In this case, sales and costs damaged operating income, showing no material gain from the pullback.
Something I'd point out here that I really like to see is lower interest expenses being incurred quarterly as the company draws down its debt levels. Macy's interest expenses were 32.8% lower in the fourth quarter year over year. Of course, that $24 million decline wasn't enough to help income grow as the company reported losses on the retirement of early debt of $29 million. Nevertheless, I like to see liabilities decreasing.
Pretax income declined 17.2% to $966 million, while the retailer took a tax hit of $226 million versus a taxes benefit of $176 million last year. The tax difference was not the main result of declining net income. Net income attributable to shareholders declined $607 million or 45% to $740 million. That income breaks down to $2.37 per diluted share, marking a comparable 45% decline in earnings.
To me this was a very disappointing quarter for Macy's. There's very little in the release to imply the company is on stable ground. Though able to claim a marginal increase, full year sales were basically stagnant at $24.97 billion. Full year operating income declined 6.7%, while full year earnings per share declined 30% to $3.56.
Relative to the stock, things are fine. That has been Macy's saving grace. At around $24 a share, the stock is trading at roughly 6x to 7x trailing full year earnings. That's pretty darn cheap. Couple in that rosy dividend of 6% (for those that can time their purchases right), and it's easy to see there is still appeal. Furthermore, the company is fine from a financial standpoint. They're still largely profitable, and have a war chest of over $1.16 billion in cash on the books. There's no reason to think the time honored retailer is doomed tomorrow. But there's not a lot in this Q4 release that leads me to believe we're due for significant stock price appreciation. Macy's is stuck in the doldrums of retail. The company noted an increase in e-commerce sales, but it was clearly overshadowed by stagnating stores.
The possible economic factors at work here are vast. They're competing against online. They're competing against other names like Kohl's (KSS) . They're competing against the names that seemingly refuse to die. To me J.C. Penney (JCP) is a dead stick. I see no way they can recover from their crippling liabilities. Yet the retailer is still going. It is still taking up market share. It is market share that Macy's needs. In my opinion, the market was saturated with too many retailers long before the advent of e-commerce. The sluggish ones are now paying the price. The names that can hold on and survive the purge should fare well, assuming they can create an online presence that compliments their stores. As I said in the beginning, I'm rooting for Macy's. Unfortunately, it's unclear which side of the equation Macy's falls on.]