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Macy's shares tumbled Wednesday even after the department store operator reported quarterly earnings and sales that topped analysts' expectations and hiked its forecast for the full year.
Tax reform and strong employment growth have boosted consumer spending — a trend that's expected to continue through this holiday season. However, Macy's is still struggling to grow sales as foot traffic dwindles at malls and retailers must compete with Amazon's powerful e-commerce platform.
The retailer has been working toward adding more local merchandise, refreshing in-store fixtures and looking for ways to lease out excess space at 50 locations, using this as a pilot test before a broader push of those initiatives. The plans helped drive some momentum during the quarter, Macy's said Wednesday. This is on top of changes it's making to improve the online shopping experience.
Investors are concerned that Macy's has sacrificed profits for those investments. And as the department store chain continues to grow its digital business, it says expenses will ramp up even more. Macy's said it hopes to offset some of that with better margins from sales of its in-house brands.
"I would expect the delivery expense is going to continue to rise just based on the momentum that we're getting in digital and what's going on with our loyalty program," CEO Jeff Gennette said on a call with analysts and investors. "[B]ut I also expect merchandise margins to go up as well."
Analysts at Jefferies said the results were "decent, but expectations were high," and described Macy's profit margins as "underwhelming," according to a research note sent to investors Wednesday.
The latest quarter for Macy's showed some signs that its latest efforts to trim excess inventory, revamp stores and grow its off-price business are paying off. The company said that strong consumer confidence in the U.S. should fuel purchases in stores and online as Macy's continues to invest back in the business. This gave the the company enough reason to raise its forecast for earnings and same-store sales for fiscal 2018.
But Macy's shares sank more than 14 percent Wednesday morning following a year-long run-up in the stock. Shares had rallied more than 100 percent from a year ago, bringing Macy's market cap to $12 billion. The stock has more than doubled since November alone, and many gains have come since results for the first quarter showed Macy's turnaround plans were taking hold.
"There are reasons for the apparent slowdown," GlobalData Retail Managing Director Neil Saunders said about the results and stock drop. "[Macy's] is still losing market share across a number of categories. Moreover, with the closure of underperforming stores, a natural bounce to comparables is to be expected — especially as some of the trade from shuttered shops finds its way to both other locations and to the digital channel."
Net income for the second quarter ended Aug. 4 was $166 million, or 53 cents a share, compared with $111 million, or 36 cents a share, a year earlier. Excluding one-time items, Macy's earned 70 cents per share, far exceeding analysts' expectations for 51 cents a share, according to a poll by Thomson Reuters.
Revenue fell 1.1 percent to $5.57 billion from a year ago but was ahead of the $5.55 billion analysts were expecting.
Sales at stores open for at least a year inched up 0.5 percent, again better than an expected decline of 0.9 percent. This marked the third-consecutive quarter of same-store sales growth for Macy's. The department store also moved its biannual friends and family spring shopping promotion into the first quarter, which lowered comparable store sales results. If that had remained in the second quarter, same-store sales would've been up 2.9 percent, Macy's said.
The company said all three divisions it operates — Macy's, Bloomingdale's and Bluemercury — "performed well" during the quarter. The one category that didn't meet expectations, according to Macy's, was mattresses — which has seen a flood of new entrants online like Casper and Purple.
Looking to the full year, Macy's is now anticipating earning $3.95 to $4.15 per share, 20 cents higher than the company previously forecast. Same-store sales are expected to increase by as much as 2.5 percent, compared with a prior target of between 1 percent and 2 percent growth.
"We … continue to be disciplined with inventory management, which allows us to give our customers more fashion and freshness, while increasing sales and improving gross margin," Gennette said in a statement. "The combination of healthy stores, robust e-commerce and a great mobile experience is Macy's recipe for success."
Macy's expects to surpass more than $1 billion in mobile sales this year, as it focuses more on this platform tied together with its recently revamped loyalty program, the company said.
Faced with the threat of becoming irrelevant to shoppers, the department store chain has been looking for ways to keep its stores and assortment of inventory appealing, especially to millennials.
Macy's recently acquired New York-based concept shop Story, bringing on Story Founder Rachel Shechtman as "brand experience officer." It's also been testing pop-up marketplaces within its stores in a handful of cities, where it's selling merchandise from some lesser-known e-commerce brands.
The company also has been adding its discount store, Macy's Backstage, to stores — including those at premium shopping malls. The goal is to find new uses for its real estate. Like other department store operators, Macy's has shuttered some of its locations in recent years, while it works with Brookfield Asset Management to consider selling or repurposing about 50 stores.
According to Gennette, Macy's will have about 180 Backstage stores open by the end of the third quarter, and the company is finding that shoppers like to buy items from there along with Macy's full-line locations. Shopping trips are up two times at stores that have a Backstage location inside, he said, and basket sizes are up by more than 30 percent at those shops.
Macy's is also in the process of rolling out mobile checkout to all of its shops by year's end.
Correction: Excluding one-time items, Macy's earned 70 cents per share in the second quarter. That outpaced analysts' expectations of 51 cents a share. A previous version of this story compared analysts' expectations to Macy's earnings that stripped out one-time items and real estate gains. On that basis, Macy's earned 59 cents a share during the quarter.