Macy's Weak Results Show Shoppers Won't Stop Chasing Deals

Wednesday, 13 Aug 2014 05:04 PM

 

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Macy’s Inc.’s latest quarterly results show cash-strapped shoppers are still on the hunt for bargains, putting pressure on retailers to cut prices in the back-to-school and holiday seasons.

The second-largest U.S. department-store chain posted earnings of 80 cents a share last quarter, missing the 86-cent average of analysts’ estimates compiled by Bloomberg. The Cincinnati-based company also cut its annual sales forecast, saying a second-half rebound was unlikely to make up for a sluggish year.

Chief Executive Officer Terry Lundgren has struggled to maintain Macy’s sales growth while a choppy economic recovery hurts consumer spending. Second-quarter sales at stores open at least a year rose 3.4 percent, missing the 3.9 percent analysts had projected. The chain has had to rely on discounts and promotional events, such as its Friends & Family sale, to get customers in the door, eroding margins.

“The consumer is still not out of the pressure zone,” Paul Swinand, an analyst at Morningstar Inc. in Chicago, said Wednesday in a phone interview. “They’re still below their comfort zone.”

Macy’s said same-store sales this year will rise as much as 2.5 percent, compared with a previous forecast of as much as 3 percent.

Swinand has a hold rating on Macy’s shares, which sank 5.5 percent to $56.47 at the close in New York, the biggest drop since June 2012. The shares have gained 5.7 percent this year.

Sales Trail

Revenue rose 3.3 percent to $6.27 billion, an improvement from the first-quarter’s blizzard-fueled 1.7 percent drop, yet still less than analysts projected.

“Our sales trend improved at both Macy’s and Bloomingdale’s in the second quarter, reflecting a rebound in shopping activity once weather patterns normalized,” Lundgren said in the statement. “We also benefited from a shift in a major Macy’s promotional event into the first two days of the quarter.”

The effect of the promotions showed up in the company’s gross margin, or the percentage of sales left after subtracting the cost of goods sold, which contracted to 41.4 percent from 41.8 percent.

The trends echo the results retailers of all stripes — from discounter Family Dollar Stores Inc. to luxury lingerie seller L Brands Inc. — reported after the last holiday shopping season.

Retail Sales

Figures released by the Commerce Department in Washington Wednesday signaled Macy’s, which operates about 840 stores, isn’t the only retailer struggling to get consumers to open their wallets.

Total retail sales were little changed in July, the worst performance in six months, as tepid wage growth restrained U.S. consumers. The slowdown followed a 0.2 percent advance in June, the Commerce Department reported in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 0.2 percent gain. Excluding cars, sales rose 0.1 percent.

Inflation-adjusted average weekly earnings dropped 0.2 percent in the 12 months through June, the worst performance since October 2012, according to Labor Department data. That left consumers with less money to spend.

Macy’s Chief Financial Officer Karen Hoguet said Wednesday on a conference call that consumers are still feeling the effects of an economy that “at best is improving very gradually.” Promotions will remain a fixture of the company’s strategy in the second half, she said.

“This is a very promotional business,” she said. “Our customer very much wants value and very much responds to promotions.”

Discount Trap

Macy’s has worked to blunt the discount trap by offering exclusive brands that consumers can’t get anywhere else and allowing managers to tailor merchandise selections to local tastes. The retailer also is investing in employee training and its online operations to boost sales.

“Macy’s is positioned with some of the best brands that retailers have access to, so I think they should be in good shape,” said Ken Murphy, who oversees $5 billion in assets as a U.S. equities portfolio manager at Standard Life Investments in Boston.

© Copyright 2014 Bloomberg News. All rights reserved.

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