Things just keep getting worse for Macy's (NYSE:M).

Shares of the bellwether department store chain are down Thursday after the company turned in an utterly terrible third-quarter earnings report. Here are the big numbers.

  • Comparable sales fell 3.9%, the company's worst performance in at least two years.
  • Net sales were down 4.3% to $5.18 billion, falling due to both the comps decline and store closures.
  • Adjusted earnings per share declined from $0.27 to $0.07, though that beat analyst estimates of breakeven adjusted EPS.
  • Macy's revised its full-year comparable sales guidance to negative 1.5% to negative 1%, down from a prior range of flat to up 1%.
  • It also lowered full-year adjusted EPS guidance from between $2.85 and $3.05 to between $2.57 and $2.77.
Macy's flagship store in Herald Square.

Image source: Macy's.

No excuses

CEO Jeff Gennette blamed the poor performance on "the late arrival of cold weather, continued soft international tourism and weaker-than-anticipated performance in lower-tier malls," but those explanations seem especially weak during a time when the American economy remains strong and the stock market has rocketed to another all-time high.

Plenty of retailers have already reported earnings. Sometimes the weather is a popular excuse, but this quarter wasn't one of them. Though later-than-expected cold weather might have pushed sales of warm clothes into the fourth quarter, that wasn't a problem for peers like Kohl's, Dillard's, and Target, which all reported significantly better comparable sales than Macy's. Even if that is the case, that would seem to benefit the fourth quarter, but the company's guidance says otherwise.

It's also awkward to blame both a decline in international tourism (which translates to high-end stores) and lower-tier malls. That's essentially Macy's entire business. Indeed, international tourism in the U.S. has been relatively flat this year, with visits up 1% through the first nine months, but spending was down 0.7% in September, according to ustravel.org. The Federal Reserve also said in its Beige Book that the travel and tourism business, which includes American travelers, remained solid through late summer. If Macy's is losing business from international travelers, then, it seems that's because those travelers are choosing to spend their money elsewhere, not because they aren't coming to the U.S.

Additionally, Macy's problems at lower-tier malls have been clear for a while now, as my colleague Adam Levine-Weinberg has explained. Traffic is falling at these B- and C-class malls, and Macy's has cut costs in these stores in order to keep them profitable. However, that's a poor long-term strategy, and it appears to be creating a vicious cycle that weighs on the brand image with dated stores and takes away useful capital from other parts of the business.

Finally, Macy's noted that improvements on its e-commerce site temporarily impacted it in the third quarter.

Bring on the activists

At this point, it's clear that Macy's strategy is failing. Comparable sales are sliding once again. Stripping out the impact of asset sales gains, adjusted earnings per share is expected to fall from $3.26 a year ago to just $2.20 to $2.40, or a decline of 26% to 33%. If that's how the company is performing in a strong economy, it would be devastated in a recession. Even in a stable economy, profits could be gone in a few years if this trend holds.

Despite its many challenges, Macy's isn't without its strengths, and the stock could be a value play with the right moves. The company has a well-known brand name, owns valuable real estate (including downtown buildings in a number of major cities), and has made some smart acquisitions in recent years, including taking over Bluemercury and Story. But the company's biggest problem is that it doesn't seem to have a coherent strategy for all the sprawling elements of its business, including e-commerce, flagship stores, lower-tier malls, Backstage, Bluemercury, and Story.

Bluemercury, for example, would seem to have Ulta-like potential in the beauty business, especially considering that Macy's has plenty of space in its stores for such a chain. Similarly, the Story acquisition seemed like it was going to guide a reinvention across Macy's stores, making them more experience-based, but that has not been the case.

Macy's needs to make some changes. Closing underperforming stores is a good place to start, and the retailer should take that capital and invest it in concepts like Bluemercury, Story, Backstage, and e-commerce. Macy's real estate assets should help put a baseline on the stock price, but it's not enough if the company's profits are disappearing this fast.

Macy's has already resisted one activist investor, Starboard Value, which had urged it to close down stores and monetize its real estate faster, but it may be time for another activist to take a swing. Either way, upper management won't be around much longer if Macy's continues to bleed sales and profits like it did in the third quarter.