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Macy's earnings beat expectations but revenue falls short

Terry J. Lundgren, CEO of Macy's
Slaven Vlasic | FilmMagic | Getty Images
Terry J. Lundgren, CEO of Macy's

Macy's earnings topped analysts' expectations Tuesday, but its top line fell short as it struggled to get consumers into its stores over the holiday period. The retailer sees tough times persisting during the fiscal year that just began, as shoppers continue to spend more of their money online.

Shares of the chain were roughly flat in afternoon trading, having given up their earlier gains.

Here's how the company did in the fourth quarter:

  • EPS: $2.02 per share, adjusted, versus $1.96 per share, adjusted, expected by a Thomson Reuters consensus estimate
  • Revenue: $8.52 billion, versus $8.62 billion expected by Thomson Reuters
  • Comparable sales: Decline of 3.5 percent, excluding licensed departments, versus a decline of 2.5 percent, excluding licensed departments, expected by FactSet

"While 2016 was not the year we expected, we made significant progress on key initiatives that are starting to bear fruit," CEO Terry Lundgren said in a statement. "These include continued improvement in our digital platforms, the rollout of our new approach to fine jewelry and women's shoes, an increase in exclusive merchandise and the refinement of our clearance and off-price strategy."

Like its department store peers, Macy's has been struggling to attract shoppers who are increasingly spending their money online, at off-price stores, and on traveling and dining out.

The company said last month that sales at its established stores fell 2.1 percent in November and December, which was at the low end of its previous guidance. That decline was despite easy comparisons from the previous holiday period when unseasonably warm weather kept shoppers from splurging on winter apparel.

Macy's earnings per share also declined during the fiscal fourth quarter, falling from $2.09 a year earlier.

The department store is taking a number of steps to try to restore its prior sales growth and profitability. On the retail side, these initiatives include expanding its Bluemercury and Backstage businesses.

The chain is also testing some ways it could reduce its reliance on coupons, which have dented its margins. Hoguet emphasized the company would proceed slowly with any changes to its promotional strategy.

As J.C. Penney learned under the leadership of Ron Johnson, moving too quickly away from promotions could alienate discount-seeking shoppers and deliver a blow to the business.

"You will hear more on this subject as we move forward," Hoguet said.

On the real estate side, Macy's reiterated that it still plans to close another 34 stores or so over the next few years. In January, the company released a list of 68 stores that it plans to close, saying it eventually planned to reach 100.

The chain is meanwhile working to boost its value by selling off some of the flagship locations it owns. Macy's has been under pressure from activist investor Starboard to make money off its vast real estate empire.

"I think [Starboard], like our other investors, they want to see our stock price go up. And so do we. We're all aligned in this regard," Lundgren told CNBC Tuesday.

Adding to uncertainties about the chain, reports surfaced earlier this month saying Hudson's Bay had approached Macy's regarding a takeover. Neither company has confirmed the validity of those reports.

"You've heard and talked about the rumors of somebody buying us, and you've probably also heard we're buying them," Lundgren said. "What I can tell you is we're going to do the right thing for our shareholders. We're not going to be a highly-leveraged retailer because those movies never turn out well. We've seen that before."

Lundgren will step down March 23 but continue on as executive chairman. He will be succeeded by Jeff Gennette, who was named Macy's president in 2014.

During the fiscal year that just kicked off, Macy's projects comparable sales excluding licensed departments will fall between 2.2 percent and 3.3. percent. Analysts had been forecasting a decline of 2.2 percent.

However, the department store said it expects sales to decrease between 3.2 percent and 4.3 percent due to store closures. Analysts had been calling for a decline of 4.1 percent.

The company also said it expects adjusted earnings per share to be between $3.37 and $3.62 a share in fiscal 2017, excluding the impact of expected settlement charges related to the company's defined benefit plans.

However, when excluding for an expected fourth-quarter gain on the planned sale of the Union Square Men's building in San Francisco and the settlement charges, Macy's should earn between $2.90 and $3.15 a share in fiscal 2017.

In fiscal 2016, Macy's generated $673 million in cash from asset sales, $209 million of which has been booked.

Correction: This story has been corrected to reflect Macy's beat analysts' earnings expectations.