Macy's (M) reports on May 15. It is fighting hard to find a strong grip in what has become a brutally tough retail environment. The competition is simply fierce these days, as traditional names work to find a balance in a world upended by e-commerce. On the one hand, Macy's stock is extremely cheap. On the other hand, the retailer is surviving but not thriving.
Macy's has had a downward trend of revenue over the last five years, which only stabilized last year when revenue grew by a timid 0.38%. Through prudent control of costs, Macy's held fairly stable gross profits through the timeframe and maintained relatively strong (though volatile) net earnings.
I think this week is going to be all about same-store sales. Earnings are important, but the stock is already trading at a very low valuation. In order to see some meaningful momentum, I think investors are going to want to see verifiable proof that Macy's can start moving past the fallout and increase the revenue streams from which income can be derived.
It has done a good job of maintaining profitability while making adjustments to the business. Now it's time to get back to growth mode. The retailer finished 2018 with basically flat sales revenue. If Macy's disappoints on same-store sales in the first quarter of 2019, I think the dividend yield could be the only positive about owning Macy's stock right now.
Let's not forget that last year included asset sales that amounted to $0.65 per diluted share. For 2019, they're expecting about $0.25 per share in gains from asset sales. While asset sales might unlock value, they don't fix the long-term problem.
At the end of the fourth quarter, M provided full year 2019 guidance of $3.05 to $3.25 excluding impairments. At $3.05, Macy's is worth about 7.37x full-year earnings. Guidance for full year sales was very cautious at 0%-1% comp sales growth. That sets the bar pretty low, and if Macy's were to surprise on comp sales, there could be a jolt this week. Pay close attention to any word on digital sales.
Walmart (WMT) reports on May 16. Perhaps the company most capable of competing on e-commerce with Amazon (AMZN) , Walmart has been pushing to increase its online presence. Sales have been growing, while its earnings have suffered from higher costs and expenses associated with the effort to catch up.
Online commerce is interesting in that it controls the focus these days, but as a whole, it seems to be less profitable. My favorite retailers for the future are the ones that are working to integrate brick and mortar WITH online sales in order to create a full-picture business.
Walmart's initiatives with online grocery orders that merge with at-store pickup are a great move. I believe it has the potential to help Walmart create consumption on a two-pronged approach by drawing consumers to stores.
The problem once again seems to be the margins. Look at Amazon. They sell a lot of online product, but the margins of their work seem very small. As Walmart moves more and more into online e-commerce avenues, one has to wonder whether the same thing will happen to their business. We are seeing the costs of building it up right now. How will the picture look down the road?
While I'm optimistic about Walmart's ability to do battle in the ever-more-competitive retail landscape, I fear that the current shrinking of earnings has created a bit of a disconnect between income and the stock price. Estimates have Walmart doing about $4.75 per share this year. That would have the stock currently trading at around 21.5x full year earnings.
Overall, it seems the time-proven success of WMT has investors remaining confident in the stock's stability, despite the lower earnings of late. If the retail king can show something special in terms of online sales growth, I think investors will likely keep forgiving the thinner profits for the promise of long-term gains.