Macy’s Q3 Earnings Beat Estimates, Sales Miss, Outlook Cut

Macy’s Inc. (M) posted third-quarter fiscal 2014 results, wherein earnings of 61 cents a share surpassed the Zacks Consensus Estimate of 49 cents, and surged 29.8% from 47 cents earned in the prior-year quarter. Lower cost of sales, fall in selling, general and administrative expenses and share repurchase activity supported the bottom line.


However, sales fell short of management’s expectation. This Cincinnati, OH-based company and a Zacks Rank #4 (Sell) stock generated sales of $6,195 million that came below the Zacks Consensus Estimate of $6,346 million, and also slid 1.3% year over year. Consequently, management trimmed its sales and earnings forecast.

Despite lower-than-expected sales, management remained upbeat about the fourth quarter because of the upcoming holiday season, Buy Online Pickup in-store initiative and Same Day Delivery program. Moreover, My Macy’s localization initiatives, omnichannel integration and magic selling still remained the driving factors. Favorable weather conditions would also boost sales.

Comparable-store sales for the quarter declined 1.4%, while including sales generated from third-party licensed departments, comparable sales fell 0.7%.

Gross profit in the quarter dropped 1.2% year over year to $2,429 million. However, gross profit margin remained flat at 39.2%. Operating income grew 17.2% to $422 million, whereas operating margin expanded 110 basis points to 6.8%.

Store Update

In the quarter under review, the company opened 3 new Macy’s outlets in Sarasota, FL; Las Vegas, NV; and The Bronx in New York City, and shuttered Macy’s stores in Bradenton, FL and York, PA. In Torrance, CA, 3 Macy’s outlets were combined into two. A new Bloomingdale’s replacement outlet was opened in Palo Alto, CA.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $1,048 million, long-term debt of $6,736 million, and shareholders’ equity of $5,351 million.

Macy’s has been actively managing its cash flow, returning much of its free cash to shareholders via dividends or share repurchase activity, and maintaining a healthy balance sheet and credit ratios necessary for an investment-grade rating.

During the quarter, the company bought back approximately 9 million shares for about $534 million. So far in the fiscal year, the company has bought back about 25.3 million shares for approximately $1.48 billion. As of Nov 1, the company had about $1.45 billion at its disposal under the share repurchase authorization.

The company generated net cash flow of $777 million from operating activities in the first three quarters of fiscal 2014 compared with $819 million in the prior-year period.


Including sales generated from third-party licensed departments, comparable-store sales are expected to increase between 1.2% and 1.5% (or 0.7% to 1% excluding licensed businesses) in fiscal 2014. Earlier, the company had projected comparable-store sales growth of 2% to 2.5% for the full year (or 1.5% to 2% excluding licensed businesses).

For the fourth quarter, management projects comparable-store sales, including sales generated from third-party licensed departments, to increase by approximately 2% to 3% (1.8% to 2.8% excluding licensed businesses).

Macy’s also lowered its full-year earnings projection to a band of $4.25 to $4.35 per share from $4.40 to $4.50. The current Zacks Consensus Estimate for the fiscal year is $4.41 per share, but could witness a downward movement in the coming days.

Other Stocks to Consider

Better-ranked stocks in the retail sector include Hanesbrands Inc. (HBI), Gildan Activewear Inc. (GIL) and Michael Kors Holdings Ltd. (KORS). All these stocks carry a Zacks Rank #2 (Buy).
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— Zacks Investment Research

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