In the last year, Macy's has been hit with everything but the kitchen sink. The strong dollar wrecked the New York City tourist trade and turned Herald Square into a ghost town. A warm winter tanked winter apparel sales. And a cooler spring wrecked another quarter.
In the first quarter, Macy's reported that same-store sales were down 6%, and management took an axe to guidance. The company said trends decelerated "meaningfully" in mid-March, which destroyed the comp figure. Management cut the fiscal 2016 earnings outlook by 15% to a range between $3.15 and $3.40. The earnings numbers would be even lower if not for the stock buyback that is expected to take about 8% to 10% of the shares outstanding out of play.
Second-quarter sales look weak. Analysts think the company will earn $5.7 billion, down 6%, and earn just 49 cents per share. In the same period last year, Macy's earned 64 cents per share. Earnings per share are down so sharply because the company has lost its operating leverage.
Gross margins are expected to be down 100 basis points to 39.9%, but operating income is expected to be down 38% to just 4.7%. Macy's is spending heavily on improving its e-commerce capabilities and on its investments in Bluemercury and the Backstage discount operation. Because of the deleveraging, earnings per share will be down almost 45%.
Macy's intentionally pushed spring markdowns into the second quarter, so this quarter could very well be the bottom. While the top line won't grow anytime soon, it seems to me management threw everything into the second quarter, clearing the decks for back-to-school and the holiday season.
Analysts think same-store sales will be down 4%, but investors will be focused on the second half and management's plan to drive same-store sales. If the company has any plans to monetize its real estate portfolio, that could drive the shares higher. Better-than-expected same-store sales could help the stock pop as well.
While the shares are down 50%, the apparel and accessories business has been tough all year and too difficult to predict.
Historically, Macy's trades near 12 times forward estimates, but right now, the consensus estimate for fiscal 2017 is $2.94, about 28 cents lower than the 2016 consensus estimate. That puts the stock less than $2 from the current quote.
I could see Macy's shares trade higher on improving comps or optimism related to real estate monetization or a big restructuring plan to close underperforming stores. But I think any pop will be a trade.
It's hard to see how Macy's could climb out of the discount bin without any meaningful top-line growth.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.