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Aug 15, 2018

Macy's shares drop despite same-store sales gain in industry-wide sell-off

Macy's Shares Fall as Higher Costs Overshadow Growth

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It’ll take more than three good quarters to convince Wall Street that Macy’s Inc. is back in style.

The department-store chain’s shares plunged as much as 14 per cent, the most on the Standard & Poor’s 500 on Wednesday -- and it appeared to spark steep declines at peers including Kohl’s Corp (KSS.N). The rout signals that Wall Street’s recent appetite for retailers like Macy’s (M.N) was short-lived and pessimism about the industry’s ability to lure consumers into stores is back.

Before the start of trading, Macy’s reported a second-quarter same-store sales gain, beating estimates and marking three consecutive quarters of expansion. The company also boosted its earnings and sales guidance for this year. But investors looked beyond the positive numbers to focus on a spike in spending, sending the shares to their biggest intraday decline in more than a year.

The losses were replicated across the industry on Wednesday: Nordstrom Inc. (JWN.N) fell as much as 6.2 per cent, while J.C. Penney Co. (JCP.N) declined 11 per cent. Beyond department stores, shares of apparel retailers such as Gap Inc. (GPS.N) and Abercrombie & Fitch Co. (ANF.N) also declined.

Macy’s has been spending to win back shoppers by offering discounts and cutting unnecessary inventory. Like its peers, the company is struggling with a broader shift by consumers to online shopping and away from brick-and-mortar stores. Even as comparable sales unexpectedly rose, net sales in the second quarter fell 1.1 per cent.

While “the quarter is good, on sales and gross margins, expenses were a little on the high side,” Poonam Goyal, senior U.S. retail analyst with Bloomberg Intelligence, said.

Macy’s executives said gross margins are expected to decline in the second half of the year compared with the first half on higher costs associated with the company’s new loyalty program. Chief Executive Officer Jeff Gennette said the chain’s online sales will grow at double-digit rates this year.

To lure back shoppers who are defecting from traditional department stores, Macy’s has been pushing its discount-focused Backstage concept, which offers an array of off-price items for bargain hunters. The retailer has opened about 65 locations in existing department stores in the first half of the year and plans an additional 55 through December. Macy’s is also expanding its Bluemercury cosmetics chain.

Those efforts helped the company report a surprise bump in comparable sales, which had declined for 11 straight quarters until the last holiday season. Same-store sales at owned plus licensed locations rose 0.5 per cent in the quarter, beating the 0.9 per cent drop analysts had expected, according to Consensus Metrix.

The department chain raised its full-year profit outlook to between US$3.95 and US$4.15 a share, excluding some items. The low point of the new range was the high point of the company’s previous forecast.

But that growth comes at a cost, with the company spending about US$100 million more in the first half of the year to fund growth.

Heading into the results, Macy’s stock has gained about 66 per cent this year, as investors have looked past a data breach and instead focused on the company’s improving performance. That’s left some room for profit-taking.

“Clearly, we’re having a little bit of sell-the-news here, into really what will be a tougher second-half comparison that Macy’s will be facing,” Brian Tunick, an analyst at RBC Capital Markets, said in an interview on Bloomberg TV.

He added that there may be confusion among investors about the profit estimates reported by data providers related to Macy’s reported profit, which included real-estate gains.

“Obviously, Macy’s is raising their full-year guidance by 20 cents, so we think this is a bullish print,” Tunick said. “While the stock is close to our price target, it shouldn’t be down 9 per cent today. We’d be buyers of the stock right now.”