Macy's Inc. (M) stock is rising after reporting first-quarter earnings that cruised past most relatively bearish analyst forecasts.
The retailer reported earnings per share of $0.44, which was well above analyst estimates of $0.33 a share, and turned in revenue of $5.5 billion, off slightly from estimates of $5.53 billion.
A 0.7% same-store sales increase was noted as a key positive, a metric that included online sales that have been a big focus for the company in recent years.
Shares of the Cincinnati-based retailer jumped more than 8% directly after the print before falling back to a gain of less than 2% before Wednesday's opening bell. Shares of Macy's have declined nearly 27% year to date, so the earnings pop is a welcome reprieve.
"Macy's Inc. is off to a solid start this year, delivering our sixth consecutive quarter of comparable sales growth and making progress against the North Star Strategy," CEO Jeff Gennette said. "As an omnichannel retailer, we are focused on growing our customer base by providing a great experience across all channels and taking market share category by category."
Gennette added that Macy's recognized double-digit growth in its digital business, with mobile sales marking the fastest-growing channel.
"We are pleased with the progress we are making on our strategic initiatives as they continue to drive top-line growth, keeping us on track to reach our 2019 goals," Gennette said. "We believe these initiatives, coupled with productivity improvements, position our company well for long-term profit growth."
The maintained outlook and commentary on continued strength of the consumer bodes well for retail peers such Kohl's Corp. (KSS) J.C. Penney Co. (JCP) and Target Corp. (TGT) as the market anticipates earnings from each company in coming weeks.
To be sure, gross margin contracted year over year, falling by about 0.8%, which analysts suspected was due to higher sales, general and administrative (SG&A) expenses and increased costs from a larger delivery sales base.
What to Expect on the Call
Given the positive vibes emanating from Macy's earnings release, the path ahead for 2019 gains likely will be touted.
"On the call, we expect an update on management's 5 key 2019 initiatives (destination categories, vendor direct, Growth150, backstage, and mobile) targeted at narrowing the delta versus industry growth," J.P. Morgan analyst Matthew Boss said.
Boss added that details on Macy's cost-saving initiatives would be ideal given the company's notable debt and pension payments, which stood at about half its enterprise value heading into earnings.
It is still worth noting that long-term debt has been cut by about $1.2 billion over the past year.
"On May 9, 2019, the company entered into a new $1.5 billion, five-year Credit Agreement that will mature on May 9, 2024," Macy's noted. "This agreement replaces a previous $1.5 billion facility, which was set to expire in May 2021. Macy's, Inc. maintains a strong balance sheet, enabling the company to extend the maturity of the agreement on similar terms."
Macy's also could carry some momentum forward by putting the market's focus on the retailer's formidable real estate footprint.
"Recent media reporting suggests that Macy's is discussing potential for major real estate development in NYC (potentially a skyscraper above Herald Square, per media)," Credit Suisse analyst Michael Binetti wrote in a note to clients ahead of the release. "While there have been several rounds of real estate monetization in recent years, the stock has never traded higher from real estate optionality -- and our view is that this time will not be any different."
It will be up to management to make the market realize the opportunity.
A key negative that analysts likely will harp on is the margin contraction, with margins continuing to fall below historical ranges.
With that in mind, the impact of tariffs should be a key point of discussion.
While 100% of the company's revenue is generated domestically after withdrawing from physical location interests in China and exiting agreements with Alibaba Group's (BABA) Tmall in late 2018, Macy's must contend with the impact of the U.S.-China trade war on supply chains and materials coming from China.
"We do expect that there will be more tariffs," Gennette said in an interview with CNBC in September 2018, anticipating the recently intensified trade tension. "It's going to start to affect a department store retailer more significantly because of the apparel pieces that are going to be part of it."
It will be important to hear how the company has sought to mitigate this impact in order to maintain its guidance estimates.
A call to explain the quarter is slated to begin at 9:30 a.m ET. Tune in here.