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Macy's Is Still Running In Quicksand

Mar. 01, 2020 1:16 PM ETMacy's, Inc. (M)65 Comments
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  • M's quarterly revenue declined slightly, while gross margin eroded.
  • SG&A costs as a percentage of revenue increased. M has to invest in its digital platform to keep pace with larger competitors.
  • The company expects a decline in comparable sales again in 2020.
  • M is running in quicksand. Sell the stock.
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Source: BarronSource: Barron's

Macy's (NYSE:M) reported quarterly revenue of $8.34 billion, non-GAAP EPS of $2.12 and GAAP EPS of $1.09. Macy's beat on revenue and non-GAAP EPS, yet missed on GAAP EPS. The stock is off over 10% post-earnings. I had the following takeaways on the quarter.

Falling Revenue

Heading into the quarter, the company's sales were falling in the low-single-digit percentage range. This quarter the company's net sales fell 1% Y/Y. This was an improvement over last quarter, yet the net sales decline was still a cause for concern. Comparable sales for owned plus licensed were down 0.5% for the quarter and down 0.7% for the year. Until Macy's arrests the comparable sales decline, the company's stock could remain challenged. On a product basis, Macy's saw strong performances from dresses, fragrances and fine jewelry. Sales for men's tailored and mattresses were also solid. The company experienced weakness in watches and housewares.

Items per transaction fell 1%. Average unit retail ("AUR") was up 1.1% on the strength of the company's Destination businesses. The increase in AUR came amid lower AUR from Backstage, the company's on-mall, off-price business. Backstage grew comps in the mid-single-digit percentage range. Off-price retailers are winning in the current retail environment, so Backstage's business model appears to have promise. However, its AUR is lower than certain other businesses. Nonetheless, Macy's was able to increase its blended AUR despite the outsized influence of Backstage.

The company's digital sales have also performed well. Macy's has invested heavily in its omni-channel to help improve customers' online shopping experience. In 2019, Macy's saw its online sales increase by over 50%. The company's mobile app contributes about 20% of the Macy's brand digital sales. According to management, the digital business generates about $6 billion in revenue. This implies digital is over 24% of total net sales, which

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

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