After announcing a reduced forecast for the year, Macy's (M -2.68%) stock took a tumble last week, falling over 5% Wednesday, when quarterly results were announced. Even though the report had a bleak tone, management was, unsurprisingly, upbeat on the second-quarter earnings conference call. Here are five things that Macy's management wants investors to think about when they consider the upside to the retailer.
Macy's is in the dark, but the lights are still on. Photo source: Macy's.
1. The worst has passed
CFO Karen Hoguet:
[We] weren't able to make up the sales shortfall from the first quarter. However, given the improved trend in the second quarter and our fall holiday strategies, we feel good about the back half of the year and did not change our sales expectations for the fall.
Macy's first quarter was dismal this year. Comparable sales fell 1.6% compared to the first quarter in 2013 and revenue was down 1.7%. That put the company on the back foot, but it still had hopes that it would be able to make up the difference, keeping its full-year targets in place. The second quarter wasn't enough to cover the first-quarter weakness, though, and Macy's this week dropped its forecast for annual comparable sales, down from 2.5%-3% to 1.5%-2%.
The issues in the first quarter aren't likely to come back up, though, so the drop in guidance is purely based off that first-quarter weakness. The first quarter suffered from a combination of bad weather and a shift in promotions that helped out second-quarter comparable sales this year. Bad winter storms kept shoppers inside and cut down on in-store sales in Q1. The promotion was a sale shifted from the first quarter into the second, hurting comparable sales to last year's first quarter while providing a boost to this year's second-quarter comparable sales.
2. Licensed sales are helping to bulk out the numbers
Hoguet:
We are expecting comp sales of 2% to 3% for the fall and the license businesses should add twenty basis points to thirty basis points to their comp growth in the back half of the year.
Comparable sales are a great metric for investors to watch as they can help illuminate just how strong a brand is. Most companies can make more revenue by opening more locations, but by comparing sales at the same locations over a year, investors can see how much more each locations is generating, on average.
Apart from its own comparable sales, Macy's has been starting to count the contributions of its licensed stores. These are retailers who set up shop inside Macy's locations and who pay a commission to Macy's based on their sales. Including these sales, Macy's is expecting its full-year comparable sales to grow between 2% and 2.5%.
3. Omnichannel sales are still the future
Hoguet:
I think the omni opportunity is, first and foremost sales growth. But what we are also finding is that this gross margin opportunity, as well as turnover opportunity from, again, better coordinating across the company and looking at inventory across channels, as well as marketing across channels. So I actually see it as a huge opportunity across the whole P&L and balance sheet and very exciting.
Macy's has been pushing its omnichannel operation heavily, investing in store pickup, mobile shopping, and ship from store. It's a system that is meant to fight the showrooming and online-only shopping that has plagued brick-and-mortar locations over the years, and Macy's has gone all-in. CEO Terry Lundgren has said that omnichannel is one of the keys to Macy's outperforming the competition.
4. Big names are the key to bringing in new customers
Hoguet:
We continue to grow our business with major, most wanted brands through increased collaboration and innovation. I am talking about brands like Ralph Lauren, Tommy Hilfiger, Michael Kors, Calvin Klein, Estée Lauder and INC.
Macy's is trying to make itself "America's destination for handbags," which is reflected in the list that Hoguet rattled off. The retailer has a portfolio of private brands, including INC denim, but it still relies on major fashion lines to get people through the door. By focusing on highfiyers like Kors, Macy's can ride the coattails of other brands' successes. That certainly helped in the second quarter, as comparable sales, including licensed departments, increased 4%.
5. Cash is still coming in
Hoguet:
Cash provided by operating activities, net of investing activities, in the first half of the year was $358 million, which is $10 million higher than last year. We issued $500 million of debt earlier this year and repaid $454 million of debt in the second quarter. We also bought back 8.9 million shares of common stock for approximately $517 million in the quarter and we have repurchased 16.3 million shares for approximately $949 million year to date.
Macy's ended the quarter with $1.6 billion in cash and cash equivalents on its balance sheet, a 14.5% increase from this time last year. The business has continued to generate cash even in weaker periods, and has been engaged in stock buybacks and dividend payments along the way. On the call, management said that it was exploring options to consolidate some of its more expensive debt, but that it has yet to find a profitable way to do so.
