Macy's Could Be Stronger Than Quarter Results Tell You

| About: Macy's Inc. (M)


Macy’s second quarter numbers fall short of analysts’ expectations.

The company fails to fully redeem itself from the ill effects of the weather-hit first quarter.

In spite of this, Macy’s shows strength in comps and is using technology to appeal to more and more customers.

Its innovative strategies like Omni-Channel are proving highly beneficial, securing a future of growth.

Department store chain Macy's (NYSE: M) delivered a lukewarm second quarter wherein the company couldn't completely overcome the damage done by inclement weather in the beginning of the year and missed estimates. The other bad news is that it has lowered the sales growth guidance for the fiscal year ending January. Does this mean bad days are knocking at the retail major's door? May not be as Macy's is one of those companies that is making efforts to not just stay abreast with the times, but to be ahead of it. It's oriented toward maximizing value for long-term investors. Here's a look at the quarter's tale and a peek into what the future may hold.

Posts decent numbers despite first quarter fiasco
The company garnered revenue worth $6.27 billion, a decent 3.3% rise from the prior year's $6.1 billion, but falling short of the Street expectations of $6.3 billion. Net income too, saw a year-over-year growth of 4% to $292 million, while the fully diluted earnings took a leap to $0.80 a share, an increase of 11% from last year's corresponding period's $0.72 a share. Analysts had predicted earnings of $0.86 per share.

Talking about Macy's earnings miss, Brian Sozzi, CEO of Belus Capital Advisors said, "The company simply overordered inventory in the first quarter when same-store sales missed. Hence, it came into the second quarter being forced to enact more unprofitable markdowns." But, at the same time he was optimistic about its future, adding, "Macy's is the pulse of the country, and with quicker job creation the company shouldn't be having any inventory issues. People should be buying the stuff."

The company implemented goal-oriented marketing strategies in order to bring back the impetus it had lost after the weather related fiasco in the past quarter. The promotional efforts worked and led to 3.4% growth in comparable store sales in the quarter, thereby pushing up overall revenue figures. "Our sales trend improved at both Macy's and Bloomingdale's in the second quarter, reflecting a rebound in shopping activity once weather patterns normalized," Macy's chairperson and CEO Terry Lundgren commented.

Cautiously optimistic about second half sales
Slowing effects from the first quarter trickled into Macy's second quarter performance, because of which the company could not meet analysts' expectations in more areas than one. This has led the management to lower the full-year sales growth guidance to a range of 1.5% to 2% from the range of 2.5% to 3% projected earlier.

Chief financial officer Karen Hoguet said, "…we weren't able to make up the sales shortfall from the first quarter. However, given the improved trend in the second quarter and our fall holiday strategies, we feel good about the back half of the year and did not change our sales expectations for the fall." The latter half of the year is expected to bring 2% to 3% betterment in sales, while full year earnings could range between $4.40 a share and $4.50 a share, which remains unchanged.

Even though the company's hopeful about its fall sales, it's also aware "that many customers still are not feeling comfortable about spending more in an uncertain economic environment". Macy's is therefore blending technology, marketing strategies and customer communication ideas to attract more customers to its stores. Macy's is gearing its annual capital expenditure budget of over $1 billion toward projects that will build its infrastructure for growth, such as Omni-channel.

Using innovative strategies to usher in future growth
Macy's add-on sales in stores have had a good run in the second quarter, thanks to the innovative Omni-Channel strategy. Moving past conventional ways of retail business, Macy's had introduced Omni-Channel marketing in 2008 and has reaped huge benefits. Omni-Channel later brought My Macy's and Magic Selling programs under its wings as part of the all-encompassing M.O.M merchandising approach.

Through Omni-Channel, Macy's is trying to integrate the online, in-store and mobile shopping experience of its customers. The multi-year strategy encompasses studying customer behavior, training associates to better deal with shoppers, and efficient ways of managing inventory and delivery. Hoguet had said, "We are working to provide our customers with seamless experiences, no matter how they choose to shop with us, and to utilize the strengths of each channel to satisfy demand and service customers' needs better than we could if we did not operate multiple channels."

Omni-Channel, that now operates nationally, brought home heartening scores on the e-commerce business front, as the company witnessed online customers pouring in. Macy's has extended its 'Buy On-line - Pickup In-Store' program to all Macy's and Bloomingdale's stores and garnered huge sales.

Banking on the Millennials - the treasure trove
Macy's focus on technological innovations like Omni-Channel has got to do a lot with the tech-savvy Millennials - people in the age bracket of 13 to 30. This group has the potential of spending more than $200 billion in a year. No wonder then they are the prime focus of Macy's and have been worth the attention as evidenced in the quarter. Macy's top line surged riding the back of certain segments, like handbags, back-to-school as well as furniture and mattress. The junior, Impulse, Active and kids segments in the back-to-school category that targets the Millennials helped the revenue increase in the quarter.

The CFO said, "I am thrilled with the progress in the junior arena, the continued very high growth in Impulse, which is the older Millennial that's and apparel component cosmetics, shoes, handbags et cetera. Also, in fact, here is the component in home now, so we are feeling very good about our efforts to attract that sort of older Millennial customer."

Final Thoughts
Macy's thoughts seem to be in place as it's not only garnering good revenues but is also concentrating on brand building and improving customer satisfaction. Though the lowered guidance is a bit of a mood spoiler, but long-term investors need not be too worried as the weather had a role to play in that. Of the things it has a hold on, Macy's is an industry leader, taking the retail business to its next level, and reaping rich dividends on the way.

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.