Macy’s may have beat earnings estimate but is still losing market share

Macy’s Inc.’s second-quarter earnings beat Wall Street estimate, but the department-store operator is still losing market share, according to Neil Saunders, managing director of GlobalData Retail.

Macy’s M, -15.95% reported adjusted earnings of 70 cents per share, blowing past the FactSet consensus of 50 cents per share. Sales of $5.57 billion also exceeded the $5.55 billion FactSet consensus, though the top-line figure represented a decline from the year-earlier $5.64 billion.

The retailer also raised its guidance, telling investors now to expect adjusted EPS of $3.95 to $4.15 for fiscal 2018, up from previous guidance of $3.75 to $3.95. Sales are expected to range from flat to 0.7% growth. And same-store sales on an owned-plus-licensed basis are expected to increase 2% to 2.5%, with same-store sales on an owned basis 20 to 30 basis points below that.

The FactSet consensus is for EPS of $3.86 and same-store-sales growth of 1.6%.

Still, shares closed Wednesday down 16%, the biggest decline in 15 months.

The department-store operator says the 53rd week in 2017 created a drag on second-quarter same-store sales, and has consequently become a drag on Macy’s stock

Macy’s reported same-store-sales growth of 0.5% on an owned-plus-licensed basis for its second quarter. A promotional shift hurt that result by about 240 basis points.

“[W]hen adjusted for the Friends & Family shift from the second quarter to the first, comparable sales were up 2.9% on an owned-plus-licensed basis for the quarter,” said Chief Executive Jeff Gennette on the call, according to the FactSet transcript.

The shift in the promotion had a positive impact on the first quarter by about 250 basis points.

Saunders suggested that looking at the first half of the year would be a better way to gauge the company’s performance. Same-store sales on an owned basis were up 1.9% and were up 2.3% on an owned-plus-licensed basis.

But Saunders said the company is far from back to “full health.”

“The sales numbers are strengthening, but they are doing so off the back of a very strong consumer economy, and it remains the case that Macy’s growth is below that of the retail market,” Saunders said.

Data from the National Retail Federation released on Wednesday shows that July retail sales increased 4.9% on a year-over-year basis, excluding cars, gas stations and restaurants.

“Consumer fundamentals remain healthy and continue to provide wherewithal for consumers to drive domestic economic growth,” said NRF Chief Economist Jack Kleinhenz in a statement, citing factors like a strengthening labor market.

When factoring in the bump from the state of the consumer, Saunders isn’t quite as upbeat about Macy’s.

“By our calculations, it is still losing market share across a number of categories,” wrote Saunders.

Saunders said one reason for the company’s “relative underperformance” is that it’s still in the beginning stages of putting a growth strategy in place.

“For example, while it has 50 stores where it is quickly implementing new ideas and plans, improvements to much of the rest of the chain are partial,” he wrote. “Many shops remain underinvested in and have a down-at-heel feel.”

Saunders suggested “substantive” investments across all of the company’s stores.

Moody’s outlined all of the steps that U.S. department stores are taking to jump-start growth in a recent note, including building capabilities across platforms, both online and in stores, and enhancing or launching mobile apps.

“We estimate that department stores now transact over 22% of their total sales online, which is well above the estimated 13% average penetration for the broader retail industry for fiscal 2018,” wrote analysts led by Christina Boni, vice president and senior credit officer. “Department stores are integrating this capability with their digital technology, big data and physical store platforms — capabilities that will be central to the success of the retail industry overall.”

Macy’s Gennette said the retailer had double-digit digital growth for the quarter, and sales rose more than 50% in the first half of the year as compared with the year-earlier period on the Macy’s app.

Macy’s shares have rallied 39.5% in 2018, while the S&P 500 index SPX, -0.76% has gained 5.4% for the period.