Macy's (NYSE:M) stock has lost half its market value so far this year as its comparable-store sales declined, its margins contracted, and its turnaround efforts fizzled out. Its stores have struggled to attract shoppers in dying malls, and competition from e-tailers like Amazon, superstores like Target, and off-price retailers like The TJX Companies' T.J. Maxx have exacerbated the pain.

The stock looks cheap at six times forward earnings with a forward dividend yield of 10%, but its recent third-quarter report -- which featured more excuses than solutions -- indicates that discount is still warranted.

A Macy's storefront.

Image source: Macy's.

Declines for the foreseeable future

Macy's revenue fell 4% annually to $5.17 billion during the quarter and missed expectations by $140 million. Its comparable-store sales fell 3.9% on an "owned" basis (which only includes sales from Macy's-owned departments) and 3.5% on an "owned-plus-licensed" basis (which is adjusted for sales from third-party departments and store-in-stores) -- marking its first quarter of declining comps in over two years.

Comps growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Owned

3.1%

0.4%

0.6%

0.2%

(3.9%)

Owned-plus-licensed

3.3%

0.7%

0.7%

0.3%

(3.5%)

Source: Macy's quarterly earnings.

Macy's also cut its owned-plus-licensed comps forecast for the full year from "flat to up 1%" to a decline of 1%-1.5%. It expects its owned comps to come in "approximately 20 basis points below" its owned-plus-licensed comps.

It also reduced its full-year revenue guidance from "approximately flat" to a decline of 2%-2.5%, compared to analysts' expectations for a 0.5% decline.

Contracting margins and sliding earnings

Macy's margins are also still slipping. Its gross margin improved sequentially, but still fell 30 basis points annually as the company continued relying on markdowns to attract shoppers. Its operating margin fell both annually and sequentially, as its cost of sales and SG&A (sales, general, and administrative) expenses accounted for a higher percentage of its revenue relative to the prior-year quarter.

Metric

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Gross margin

40.3%

37.5%

38.2%

38.8%

40%

Operating margin

2.7%

12.4%

3.7%

2.8%

1%

Source: Macy's quarterly earnings.

During the conference call with analysts, CFO Paula Price warned that Macy's fourth-quarter gross margin will experience "a little bit more compression than we saw in the third quarter," and that its full-year gross margin will be "moderately down" from 39.1% in 2018.

Macy's adjusted EPS tumbled 74% to $0.07 in the third quarter and missed expectations by $0.08. It also cut its full-year adjusted EPS forecast from $2.85-$3.05 to $2.57-$2.77, which implies a 34%-39% drop from 2018 and misses analysts' expectations for a 33% decline.

Bring on the excuses

During the call, CEO Jeff Gennette attributed Macy's slowing growth to "continued soft international tourism, weaker-than-anticipated performance in our lower tier malls, and the late arrival of cold weather."  He also said Macy's e-commerce business was disrupted by "work on the site in preparation for the fourth quarter."

The outside of a Macy's store.

Image source: Macy's.

Gennette's "soft international tourism" claims raises eyebrows, since the quarter's 6.3% year-over-year drop in sales to international tourists marked an improvement from the 9% decline in the second quarter, when it posted better comps growth. Macy's expects its international tourism sales to drop 6%-9% for the rest of the fall season.

Many of Macy's stores are still anchors for struggling malls, so it wasn't surprising for Gennette to attribute some of the retailer's woes to what's going on at "lower tier malls." That situation won't change anytime soon as Macy's still hasn't offered compelling plans for transforming its namesake, Bloomingdale's, and Backstage stores into stand-alone stores.

Gennette said that the late arrival of cold weather gave sales a "jolt" as the quarter was changing to the next one. "Given Macy's status as a destination for cold weather apparel, we saw an impact in both cold weather merchandise and in the same trip purchases that our customers typically append," he said. "Now that the cold weather has arrived, we're beginning to see those sales flow through."

Target also noted that cold weather shopping boosted its comps growth in the third quarter. However, Target said its comps were also boosted by strong back-to-school sales and "broad market share gains" across all its merchandise categories.

Macy's e-commerce problems sound like self-inflicted wounds caused by a poorly planned rush to chase Amazon, Walmart, and Target in the digital race. That's a troubling development as Macy's heads into the busy Thanksgiving weekend -- which could test the mettle of its e-commerce platform.

A rough road ahead

Macy's is still in better shape than J.C. Penney, but it faces similar headwinds, and its management seems reluctant to take bold steps to fix its business.

Macy's might stand a chance if it aggressively converts more of its namesake stores to off-price Backstage stores to challenge T.J. Maxx, forges a return partnership with Amazon like Kohl's, or boosts its investments in an aggressive e-commerce expansion like Target or Walmart.

Instead, Macy's is blaming the weather and tourism for its woes and not taking action. Investors should avoid this stock until the company takes a long look in the mirror and reevaluates its core business.