Macy's Inc. (M) is seeing an even deeper discount to its multiple on Wednesday after a wide miss on its second-quarter earnings and a reduction in its outlook for all of 2019.
Macy's said diluted earnings for the quarter came in at 28 cents per share, down nearly half from its year-earlier profit and 17 cents short of analyst estimates.
While revenue held in line, the big miss and messy dynamics in the retail sector prompted management to cut its full-year EPS forecasts to a range of $2.85 to $3.05 per share, down from a prior forecast of $3.05 to $3.25 per share.
What's worse for investors is that the more bearish forecast does not even include the impact of coming tariffs, removing another explanation.
Shares of the Cincinnati-based retailer were down 17% shortly after Wednesday's opening bell to mark the lowest opening price in nearly a decade.
"We had a slow start to the quarter and finished below our expectations," Macy's CEO Jeff Gennette admitted. "Rising inventory levels became a challenge based on a combination of factors: a fashion miss in our key women's sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism."
Gennette said Macy's had to take its medicine and discount much of the product to clear the excess inventory.
"We took markdowns to clear the excess Spring inventory and are entering the Fall season with the right inventory to meet anticipated customer demand," Gennette said.
Markdowns had a significant effect on Macy's margins, which fell nearly 2% year over year to 38.8%, only one quarter after a smaller drop in margins had been a pinpointed problem among analysts.
Considering that Macy's guidance does not factor in tariffs and Gennette noted that consumers do not have an appetite for price increases, the company's margins could remain under pressure for the foreseeable future.
Nonetheless, Gennette offered up positives in the pessimism-provoking quarter.
"While we had seasonal inventory challenges in Spring, there are many areas of the business that are performing well, notably our Destination Businesses," Gennette said. "We continue to see healthier sales within our brick-and -mortar business, led by our Growth50 stores and Backstage expansion. Our digital business posted its fortieth consecutive quarter of double-digit growth, and mobile remained our fastest-growing channel."
Macy's is celebrating 40 straight quarters of (unspecified) double digit growth in digital! 10yrs!
I doubt anyone currently working for Macy's remembers who started tracking this metric. By the laws of compounding it's weird digital could be up double digit w/ .2% total SSS pic.twitter.com/wfQeUimEYZ— Jeff Macke (@JeffMacke) August 14, 2019
Gennette also noted that same-store sales continued to make gains, extending a streak of gains in the metric.
Spinning these smaller factors to turn the stock story positive is a tall order, especially as investors may question just how safe the dividend is.
A conference call wherein management will try to sell the story kicked off at 9:30 a.m. and is available here.
$M continues to get worse. If it opens here it will yield 9.3%*
*enjoy before they cut the dividend pic.twitter.com/0le4VAjLqe— Tom Hearden (@followtheh) August 14, 2019