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Macy’s Q1 Profits Fell, And More Speed Bumps Could Be Lurking Ahead

Macy’s Inc. delivered its sixth consecutive quarter of comparable sales growth as it bested Wall Street’s adjusted diluted earnings per share estimate by 11 cents, while progress on strategic initiatives has the retailer reaffirming 2019 guidance. Some analysts, however, are raising concerns over a possible slow start to the second quarter.

In a Nutshell: Jeff Gennette, Macy’s chairman and chief executive officer, said the company had a solid start to the year and that it was making progress against its North Star Strategy.

“As an omnichannel retailer, we are focused on growing our customer base by providing a great experience across all channels and taking market share category by category. Our brick and mortar sales trend improved sequentially in the first quarter, supported by the Growth50 stores and Backstage,” Gennette said, adding that the company also had another quarter of double-digit growth the digital business, and that mobile continues to be its fastest-growing channel.

Macy’s entered into a new $1.5 billion, five-year credit agreement on May 9, 2019. The new agreement, which will mature on May 9, 2024, replaces the previous facility that was set to expire in May 2021. Macy’s said that because it “maintains a strong balance sheet, [that enabled] the company to extend the maturity of the agreement on similar terms.”

Christina Boni, analyst at credit ratings firm Moody’s Investors Service, said, “Macy’s continues to work toward stabilizing its operating performance and remains disciplined in prioritizing debt reduction to meet its target leverage. First quarter sales benefitted from double digit growth in e-commerce with its fastest growth at mobile.”

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But Boni also noted, “Although comparable sales increased 0.7 percent, comp inventories were up 2.4 percent as spring receipts remained elevated from slower sell through.”

Net Sales: For the quarter ended May 4, the company said sales dipped 0.7 percent to $5.50 billion from $5.54 billion. Comparable sales, including licensed operations, rose 0.7 percent in the quarter. Excluding the licensed component, comps on owned operations rose 0.6 percent.

Dana Telsey of Telsey Advisory Group said the EPS beat “appeared to be driven by higher same-store sales as well as gross margin, which came to 38.2 percent [and the] greater-than-expected asset sale gains” from Macy’s real estate portfolio.

Earnings: Net income was down 2.2 percent to $136 million, or 44 cents a diluted share, from $139 million, or 45 cents, a year ago. On an adjusted basis, net income was $137 million, or 44 cents a share.

Wall Street was expecting EPS of 33 cents on sales of $5.52 billion.

The balance also included a gain of $43 million on a pre-tax basis, or $31 million after-tax, from the sale of real estate.

Macy’s also reaffirmed its prior 2019 guidance. That projected adjusted diluted EPS at between $3.05 to $3.25, net sales flat to 2018, and comparable sales at flat to up 1 percent.

UBS retail analyst Jay Sole expressed concern over the retailer’s guidance, noting that while Macy’s beat on EPS and delivered a comps gain in a tough retail environment, the retailer also missed consensus for total sales, coming in at $5.50 billion versus expectations of $5.53 billion. That could put a bit of negative sentiment on the stock, while “rising tariff risk has caused the market to look for any retail stock pop as an opportunity to revisit on the negative side,” Sole noted.

Furthermore, keeping fiscal 2019 guidance unchanged, given the first-quarter EPS beat, could suggest that the second quarter “has started slowly,” the analyst said.

Sole is “neutral” on shares of Macy’s. Because operating income was still down 31 percent versus a year ago, excluding real estate, and EPS fell 9 percent compared with the year-ago quarter, this, Sole said, “suggests to us Macy’s still faces big challenges.”

CEO’s Take: “We are pleased with the progress we are making on our strategic initiatives as they continue to drive top-line growth, keeping us on track to reach our 2019 goals,” Gennette said. “We believe these initiatives, coupled with productivity improvements, position our company well for long-term profit growth.”