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Macy's shares tank 13% as deep discounting leads to a big earnings miss and a cut in forecast

Key Points
  • Macy's fiscal second-quarter earnings miss analysts' expectations.
  • The department store chain lowers its profit outlook for the full year by 20 cents.
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Macy's posts big earnings miss for the second quarter

Macy's fiscal second-quarter earnings report on Wednesday fell way below analysts' expectations, as heavy markdowns used during the spring season to clear unsold merchandise weighed on profits.

Macy's also lowered its profit outlook for the full year and now is expecting to earn between $2.85 and $3.05 a share, down from a range of $3.05 to $3.25.

"Consumer spending continues to be healthy," CFO Paula Price said on a call with analysts. But with so many macroeconomic uncertainties remaining, the company lowered its full-year forecast, she said, taking into account things Macy's "cannot control."

Macy's shares, valued at $5.19 billion, closed Wednesday down more than 13%. Earlier in the day, shares hit a low of $15.82, a level not seen since February 2010. And the drop led to a broader sell-off, bringing shares of Nordstrom, J.C. Penney and Kohl's down.

Here's what Macy's reported for the fiscal second quarter ended Aug. 3 compared with what analysts were expecting:

  • Earnings per share: 28 cents vs. 45 cents expected
  • Revenue: $5.546 billion vs. $5.542 billion expected
  • Same-store sales: up 0.3% (owned plus licensed basis) vs. 0.4% expected

"Rising inventory levels became a challenge based on a combination of factors: a fashion miss in our key women's sportswear private brands, slow sell-through of warm weather apparel and the accelerated decline in international tourism," CEO Jeff Gennette said in a statement.

"We took markdowns to clear the excess Spring inventory and are entering the Fall season with the right inventory to meet anticipated customer demand."

Net income dropped to $86 million, or 28 cents a share, from $166 million, or 53 cents, a year earlier. That missed analysts expectations for 45 cents, based on Refinitiv data.

Net sales fell to $5.546 billion from $5.572 billion a year earlier, slightly beating expectations for $5.542 billion.

Sales at Macy's stores and its website operating for at least 12 months were up 0.3%, short of expectations for growth of 0.4%.

Department stores are increasingly under pressure with more people shopping online, renting clothes and accessories from places like Rent the Runway and buying directly from brands instead of going to the mall. Macy's certainly hasn't been immune to these struggles. The company has been trying to refresh its stores, amass more loyal customers through its updated app and membership program, and is adding stop-in shops to some locations for popular brands.

It also on Wednesday said it would be getting into the clothing rental and apparel resale businesses, as a way to hopefully acquire more customers.

Credit Suisse already warned earlier this month that department stores could be in for a "sobering" holiday season, calling out the fact that, at Macy's in particular, the second quarter was "much more promotional than planned."

Retailers also have been pressured by the threat of tariffs on a wide range of consumer goods made in China. A 10% tariff was set to go into effect on Sept. 1 on clothing, apparel and other items, but the tax on some items has now been delayed until Dec. 15.

Macy's said it's "evaluating the details of these tariffs and is actively working with its vendor partners and suppliers in China to help mitigate potential impact."

"The customer has no appetite for price increases," Gennette said in an interview with CNBC on Wednesday morning. He said Macy's had accelerated some shipments of holiday inventory from overseas to get them into the U.S., but that "a bulk" of the retailer's holiday goods still remain offshore.

Macy's is still calling for net sales to be about flat for the year, with same-store sales expected to be flat to up 1%.

"Taking the markdowns was certainly tough medicine, but it was important that we enter the fall season with aligned inventory and sales plans," Price said.

She said promotional activity should be more "normal" for the rest of 2019. Macy's ended the quarter with inventories about flat, compared with up 2.4% in the first quarter.

"Department stores continue to be challenged in their effort to stabilize operating margins," said Christina Boni, a Moody's analyst. "Second quarter performance was clearly disappointing." But with the inventory reduction, "Macy's should be better positioned to enter the fall season."

Macy's shares are down nearly 60% from a year ago. The S&P 500 Retail ETF (XRT) is down about 25%.