Macy's Turnaround Hits Harsh Retail Reality -- 2nd Update

Date : 08/14/2019 @ 8:37PM
Source : Dow Jones News
Stock : Macys Inc (M)
Quote : 15.98  -0.18 (-1.11%) @ 12:59AM

Macy's Turnaround Hits Harsh Retail Reality -- 2nd Update

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By Suzanne Kapner and Aisha Al-Muslim 

Macy's Inc. lowered its full-year earnings outlook after missing profit expectations in the latest quarter, as department stores continue to lose shoppers to newer forms of retailing.

In a troubling sign heading into the key back-to-school and holiday seasons, the department store chain said inventories of unsold items swelled in the summer quarter. At the same time, the company and its rivals face the prospect of tariffs on some Chinese apparel imports starting next month.

Sales at stores open at least a year rose 0.2% in the three months ended Aug. 3. Including licensed departments, the measure grew 0.3%. But net income nearly halved to $88 million from $166 million a year earlier on lower asset sales and higher merchandise markdowns.

The results sent Macy's shares tumbling, and darkened the outlook for the broader retail sector as it kicks off its earnings season. Macy's stock fell 15% to $16.45 in midday trading Wednesday. Shares are down about 54% in the past 12 months.

Macy's Chief Executive Jeff Gennette said consumer spending remained healthy, but Macy's wasn't gaining market share in a sea of tough competition, although it had started to narrow the gap.

"The customer has more choices than ever," Mr. Gennette said in an interview Wednesday. "There are new formats emerging every single day. Brands have their own retail stores and digital channels. Off-price retailers continue to gain share."

Mr. Gennette has succeeded in reversing several years of same-store sales declines, creating hope for a broader turnaround in the business.

But this year got off to a slow start, Mr. Gennette told analysts on a conference call, leaving Macy's with too much inventory. That necessitated bigger-than-expected markdowns to clear unsold goods, which hurt profits, he said, adding that the company entered the current quarter with the right inventory mix.

Macy's' latest results weighed on rivals, which are set to report their latest results in coming days. Shares of Nordstrom Inc. and Kohl's Corp. fell more than 10% in Wednesday midday trading, while J.C. Penney Co.'s stock was down over 8% amid a broader market selloff.

Macy's and other chains have been closing weaker stores in recent years and spending to expand their e-commerce efforts. The companies are struggling to capture shoppers despite strong consumer spending and low U.S. unemployment.

High-end department store chain Barneys New York Inc. recently filed for chapter 11 bankruptcy protection, with plans to close 15 of its 22 stores. Meanwhile, the owner of Sears and Kmart, which filed for bankruptcy last fall, said this month it is closing another two dozen locations. And J.C. Penney said last week that it was at risk of being delisted from the New York Stock Exchange because its shares hadn't traded above $1 for 30 consecutive days.

Nordstrom is under fire, too, with some directors pushing to bring in an outsider as CEO as the company's financial performance has deteriorated in recent months.

Macy's has been experimenting with new concepts to draw shoppers to its stores. Mr. Gennette said on Wednesday that the chain was joining with resale marketplace ThredUp to sell used clothing and accessories in 40 Macy's stores. Its Bloomingdale's chain recently unveiled plans to launch a rental service called My List.

For the current fiscal year that ends in early 2020, Macy's lowered its earnings guidance by 20 cents. Excluding settlement charges, and impairment and other costs, the company now forecasts adjusted earnings per share of $2.85 to $3.05 for the year, compared with its previous estimate of $3.05 to $3.25.

Despite the expected fall in profit, Macy's reaffirmed its annual sales guidance. The company still expects net sales to be roughly flat from the last fiscal year, with comparable sales to be flat to up 1%. In the recently completed period, net sales fell 0.5% to $5.55 billion.

Despite a rise in same-store sales in the recent quarter, gross profit dollars fell the most since the third quarter of 2017 and inventory remains bloated, up 5% a square foot, according to Citi analyst Paul Lejuez.

Mr. Gennette said rising inventory levels became a challenge because of several factors, including "a fashion miss in our key women's sportswear private brands, slow sell-through of warm-weather apparel and the accelerated decline in international tourism."

On Tuesday, the Trump administration abruptly suspended plans to impose new tariffs on about $156 billion in goods from China until Dec. 15 on items including toys, cellphones and laptop computers that had been set to take effect Sept. 1. Tariffs on about $13.7 billion of fabrics and apparel were postponed until the end of the year, but tariffs will still move forward on about $39 billion of such items.

The tariff delay comes as companies expressed concerns about the impact an escalating trade fight would have on businesses and consumers ahead of the holiday shopping season. Retailers' profit margins have already been under pressure as they spend on upgrading their digital capabilities and remodeling their stores.

Mr. Gennette said Macy's is assessing the details of the latest tranche of tariffs, but noted that shoppers have no appetite for price increases.

The company raised prices in May on some goods, including luggage, housewares and furniture, but the increases weren't well received by shoppers, he said. Instead, Macy's is working with vendors to add details such as beading, rhinestones and other embellishments that shoppers would be willing to pay more for.

Mr. Gennette added that if tariffs on Chinese imports stay at 10%, they have no significant impact on Macy's business. But if they rise to 25% on a wider selection of goods, that could lower full-year earnings by roughly 5 cents.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com and Aisha Al-Muslim at aisha.al-muslim@wsj.com

 

(END) Dow Jones Newswires

August 14, 2019 15:22 ET (19:22 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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