In an interview with CNBC on the morning of Black Friday, Macy's (M +2.80%) CEO Jeff Gennette indicated that the company had a strong start to the holiday selling season. This was welcome news for investors, as Macy's has posted declining comparable-store sales for 11 consecutive quarters.
Unfortunately, soon after that interview aired, Macy's experienced a server glitch that slowed the processing of credit cards and gift cards to a crawl. This led to massive lines in Macy's stores, failed transactions on the macys.com website, and a huge outcry on social media. Some pundits predicted that customers who encountered problems might avoid Macy's for the rest of the holiday season.
However, this temporary credit card processing issue doesn't seem to have broken Macy's momentum. In fact, the company just announced on Friday that it will hire 7,000 more seasonal workers for the rest of the holiday season.
Low expectations
Through the first three quarters of fiscal 2017, Macy's recorded a 3.6% year-over-year decline in comparable-store sales. As a result, it began the holiday season with modest expectations, despite having high hopes for its revamped loyalty program and other turnaround initiatives.
Macy's entered the fourth quarter with modest sales expectations. Image source: Macy's.
Macy's official guidance calls for a full-year comp sales decline of 2%-3% (including licensed departments). On the Q3 earnings call, CFO Karen Hoguet stated that management expects results to be near the low end of that range. This would imply a Q4 comp sales drop of 1.9%. To hit the high end of the full-year comp sales forecast, Macy's would need to achieve a 1.1% comp sales increase this quarter.
These modest expectations filtered through to Macy's holiday hiring plans. In September, the company announced that it would be hiring for 80,000 seasonal positions, down from 83,000 a year ago. Furthermore, it increased its hiring for direct-to-consumer fulfillment centers by 3,000 positions, meaning that it reduced the number of store-based seasonal positions by 6,000 compared to last year.
A sales turnaround at last?
Fortunately, sales trends for department stores are finally improving. No. 2 department store chain Kohl's (KSS +1.12%) posted a modest 0.1% comp sales increase last quarter, helped by a strong uptick in demand for cold-weather items in late October. Kohl's executives noted on the company's Q3 earnings call that sales trends remained strong in early November, helped again by chilly weather.
Macy's has seen similar trends. "We had a good start to the fourth quarter, and Black Friday was very strong online, as well as the traffic that came into our stores last night and that are here today in our stores," Gennette said in the interview with CNBC.
This bullish proclamation -- along with solid updates from Kohl's and other department stores -- was a promising sign that the high end of Macy's sales guidance might be within reach after all. However, to many observers, the credit card glitch that showed up shortly thereafter seemed to eliminate the possibility of such a positive sales surprise.
The recent news that Macy's wants to hire 7,000 more associates for the remainder of the holiday shopping season suggests that the retailer hasn't experienced a lingering impact from its Black Friday snafu.
By the time of the announcement, Macy's had nearly a week of post-Black Friday data to evaluate customer traffic trends. The company has been extremely careful about reining in costs in recent years, so it wouldn't add extra staffing unless it was supported by demand.
This stock has more upside
Macy's is lucky that its credit card processing problems didn't begin until after noon EST on Black Friday. By that point, many consumers were already done shopping for the day, limiting the impact on sales. As a result, the company still seems to have a realistic chance of reaching the upper part of its comp sales guidance range.
Its stock has rocketed higher as the sales outlook has brightened. In fact, its Friday closing price of $24.19 was 39% ahead of the 52-week low it notched less than a month ago.
Macy's stock performance. Data by YCharts.
Nevertheless, stock remains more than 40% below where it sat at this time last year, even though Macy's has reduced its debt by $1.2 billion over that period. (Macy's plans to pay off another $400 million of debt ahead of schedule in the next few weeks.) Furthermore, the stock still trades for just eight times the company's projected 2017 adjusted earnings per share.
In other words, even after its recent surge, Macy's stock is valued as if the company's earnings power is about to collapse. If Macy's continues to show staying power, the stock could rally a lot further.
