Three months ago, Macy's (M +0.42%) smashed analysts' expectations -- as well as its own guidance -- with a solid first-quarter earnings report. While sales remained below pre-pandemic levels, adjusted earnings per share actually exceeded the company's result from the first quarter of fiscal 2019, thanks to a strong margin performance.
Following its big Q1 earnings beat, Macy's raised its guidance for the rest of the year. Nevertheless, management continued to take a conservative view of the U.S. retail environment. That has Macy's on pace to crush its guidance and the analyst consensus again when it releases its second-quarter earnings report later this week.
A conservative second-quarter forecast
In May, Macy's projected that it would post second-quarter sales of $4.9 billion to $5 billion: down 10% to 12% relative to the same period two years earlier. It also called for adjusted EPS between $0.03 and $0.12, compared to $0.28 in the second quarter of fiscal 2019.
Even at the time, this guidance appeared conservative. While first-quarter sales fell 14.5% compared to Q1 2019, the sales trajectory accelerated throughout the quarter, putting the department store giant on track to record a significantly smaller sales decline in the second quarter.
Image source: Macy's.
Nevertheless, the analyst consensus currently calls for Macy's to log Q2 sales of $4.96 billion -- near the middle of the guidance range -- and EPS of $0.13: just ahead of management's outlook.
Three great signs for shareholders
Investors have several reasons to be optimistic about the upcoming earnings report. First, fellow department store Dillard's (DDS +1.55%) just released a blowout earnings report last week. Retail sales jumped 12% compared to Q2 2019, and Dillard's posted an incredible 15.3% pre-tax margin after routinely losing money in the second quarter in recent years.
Second, multiple data sources point to strengthening sales trends for U.S. department stores. The Census Bureau's most recent retail sales report estimated that seasonally adjusted sales at department stores rose 5.9% sequentially in June, following a 1.9% increase in May. More recently, a Placer.ai report found that store traffic fell about 17% compared to 2019 in May and June and fell less than 6% in July. For comparison, Placer.ai estimates that store traffic plunged 32% in March and 25% in April.
Third, Macy's announced earlier this month that it will redeem $1.3 billion of debt (which it issued during the peak of the crisis last year) on Aug. 17. Including the redemption premium, this will have a cash cost of roughly $1.4 billion. The decision to retire this debt immediately suggests that the company generated strong cash flow last quarter and that management is confident about the rest of the year.
Together, these data points suggest that analysts' forecasts for the second quarter are far too pessimistic. That said, investors shouldn't expect Macy's to match the incredible results at Dillard's. Unlike Dillard's, Macy's gets a substantial proportion of its sales from big city-center stores and stores in major international tourism markets. Traffic at those stores will lag until more offices reopen and international tourism to the U.S. rebounds.
Image source: Macy's.
The future is brighter than it had appeared
The U.S. department store industry has been shrinking for decades. When the pandemic hit last year, many pundits (and investors) assumed that it would finish off Macy's and many of its fellow department stores, along with the malls in which most of their stores are located.
The impressive rebound in department store sales and mall traffic during 2021 has disproved this theory. While the rapid spread of the Delta variant -- and perhaps other variants -- could slow the sales recovery in the near term, the past few months have shown that quite a few American consumers still like shopping at malls and department stores. That bodes well for a full recovery for sales and profit whenever the pandemic does end.
