Please ensure Javascript is enabled for purposes of website accessibility

Macy's Reports Another Strong Quarter -- But the Stock Sinks Again

By Adam Levine-Weinberg - Nov 14, 2018 at 1:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Macy's delivered another excellent quarterly earnings report, but investors seem more worried about whether the results are sustainable.

Investors had left Macy's (M -1.91%) for dead a year ago -- which wasn't that surprising, as the company had reported 11 straight quarterly comparable sales declines. However, the iconic retailer has turned things around over the past 12 months. On Wednesday morning, it reported strong results for its third fiscal quarter, including a fourth consecutive quarterly comp sales increase.

This remarkable comeback has helped Macy's stock roughly double since bottoming out a year ago. Yet it remains well below the 52-week high it reached back in August. Moreover, Macy's stock retreated again on Wednesday, despite the company's solid earnings beat.

M Chart

Macy's Stock Performance, data by YCharts.

The recovery continues

Macy's posted a solid 3.3% comp sales increase in its third fiscal quarter, including the results of licensed departments. This easily outpaced the 2.3% comp sales gain that it recorded in the first half of fiscal 2018. Total sales came in at $5.4 billion, up 2.3% year over year. Including revenue from Macy's credit card program, total revenue reached $5.6 billion last quarter.

Gross margin came in at 40.3% for the quarter, even with the year-ago period. Meanwhile, selling, general, and administrative (SG&A) expenses ticked up 3.1%, slightly faster than Macy's rate of sales growth. Additionally, Macy's recorded $42 million of asset sale gains last quarter, compared to $65 million of gains in the third quarter of fiscal 2017.

The net result was that adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 3.8% to $407 million. However, lower interest expense -- driven by Macy's debt reduction efforts -- and a lower tax rate meant that adjusted net income jumped 28% to $83 million. Adjusted earnings per share (EPS) reached $0.27, up from $0.21 a year earlier. This was nearly double the average analyst estimate of $0.14.

The exterior of the Macy's flagship store in Manhattan

Macy's EPS came in far ahead of analysts' expectations again last quarter. Image source: Macy's.

Guidance keeps rising

While Macy's was facing relatively easy year-over-year sales and earnings comparisons last quarter, its results still exceeded management's expectations. That paved the way for the company to raise its full-year guidance for a third straight quarter.

Macy's now expects a full-year comp sales increase between 2.3% and 2.5%, including licensed departments. Its previous guidance had called for comp sales to rise 2.1% to 2.5%.

The department store giant also boosted its EPS guidance again. It now expects adjusted EPS of $4.10 to $4.30, up from a previous guidance range of $3.95 to $4.15. Entering fiscal 2018, Macy's had projected that adjusted EPS would come in between $3.55 and $3.75.

Why are investors so skeptical?

As of the early afternoon on Wednesday, Macy's stock had fallen 5% to around $34. Macy's shares also plummeted after the company's "beat-and-raise" second-quarter earnings report, which I saw as a buying opportunity. This week's plunge looks no different to me.

Some pundits argue that with the economy growing like it is today, Macy's ought to be posting even stronger comp sales growth. Others fear that comp sales growth will slow dramatically next year, when Macy's will be facing much tougher comparisons. These concerns seem to be driving the recent share price weakness for Macy's.

However, the bar for success is quite low. Based on Macy's most recent guidance update, the stock now trades for just eight times its estimated fiscal 2018 earnings, making it extremely cheap. Furthermore, Macy's has renovated many of its stores this year as it implements various sales-driving initiatives. In the short term, that construction likely depressed sales last quarter, but the long-term sales tailwind from the renovations could be substantial.

Finally, Macy's debt reduction efforts have reduced its interest expense. Next year, the company will likely resume its share repurchase program, which will provide another EPS growth driver. In short, Macy's is well positioned to keep growing EPS beyond 2018. As a result, the stock deserves a significantly higher valuation.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$17.97 (-1.91%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.