You’d think that a retailer handily beating sales estimates and raising its full-year forecast would rev up its stock price.
But as Macy’s (M) learned on Wednesday, that’s not always the case. The department store chain reported that comparable store earnings, including business in departments it licenses to third parties and e-commerce, rose 0.5%, beating the 1% drop that Wall Street had expected, according to Consensus Metrix. And Macy’s raised its full year sales growth forecast a bit and now expects total sales to range from unchanged to 0.7%.
Yet despite the strong earnings results—Macy’s third quarter of comparable sales growth after three years of declines—its stock tanked 14%, and stoked a sell-off in other retailer stocks. Nordstrom (JWN), Kohl’s (KSS), J.C. Penney (JCP), and Gap Inc (GPS) all dived along with Macy’s.
So what’s the problem? Macy’s shares had a 67% run up through Tuesday, so there was some profit-taking. But that is not enough to explain the bloodbath.
A lot of it likely had to do with the strong retail numbers. The government that said retail sales in July had risen 6.4% over a year earlier. While Macy’s is not a general merchant like Walmart (WMT), its relatively small sales gain (Macy’s would have been up 2.9% for the quarter) had its big annual family and friends sale not been in the first quarter) was hard to get excited about in light of strong industry-wide growth and the best consumer environment in ages.
Indeed, the soft numbers suggest Macy’s, like many of its peers, is still not holding its own again the same cast of rivals that have taken a huge chunk of their business in recent years, particularly retailers like Amazon.com, Ulta Beauty and TJX Cos’ T.J. Maxx chain.
“It is still losing market share across a number of categories,” Neil Saunders, managing director of GlobalData Retail, wrote in a research note. What’s more, Macy’s said gross profit margin would slip a bit in the second quarter, even as it manages to rein in some of its notorious discounting.
It’s not that Macy’s has been idle. It has slimmed down its organization chart to tame its once-notorious bureaucracy. It has closed hundreds of weak stores, and focused on a subset of 50 stores that are representative of the whole fleet to come up with new ideas faster and implement them. Macy’s has taken stakes in innovative companies such as b8ta and Story to shake up Macy’s culture and speed up its metabolism. And it is speeding up production of much of its clothing selection and narrowing its assortment. It has also added features such as mobile checkout in stores.
These are helping Macy’s store business, where some 80% of sales are still rung up. As CEO Jeff Gennette told Coins2Day in an interview after Macy’s earnings results, “My headline here is that brick-and-mortar is the big change in our overall trend change.” (An encouraging sign was how Macy’s digital sales continued to fast growth, rising by at least 10% for the 36th straight quarter.)
But as investors showed on Wednesday, those changes will need to be more dramatic and come more quickly to quell lingering fears about Macy’s longer-term viability.
