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Macy’s Profit Warning, 3.5% Comps Slide a Bellweather for B and C Malls?

Macy’s Inc. issued its third profit warning this year after a dismal third quarter in which comps sank 3.5 percent. Department stores like Macy’s tend to anchor lower-tier malls, where sluggish traffic, and not so much a merchandising problem, is weighing down the business.

In a Nutshell: Macy’s lowered guidance for fiscal 2020 after reporting lower sales in the quarter and higher inventory levels than analysts would like.

Macy’s chairman and CEO Jeff Gennette said the “sales deceleration was steeper than we expected.” Quarterly sales were “impacted by the late arrival of cold weather, continued soft international tourism and weaker than anticipated performance in lower tier malls,” he added, all factors fueling the 3.5 percent comparable sales decline, on an owned plus licensed basis, for the quarter.

Dana Telsey of Telsey Advisory Group expected comps to be down 0.6 percent versus last year’s comps gain of 3.1 percent, and said in a First Look report that the decline is “especially concerning given that the miss appears to be, at least in part, structural in nature (weaker performance at lower tier malls) rather than a correctable execution miss.”

The “structural challenges to mall traffic aren’t going away,” Randal J. Konik at Jefferies noted in his Quick Take report. “Guidance was lower and we think is likely to continue a path of negative revisions ahead so we don’t see a reason to step in and buy shares.”

Konik concluded that the mall is becoming more toxic, with value-oriented and off-price retailers such as Target, Walmart and TJX continuing to outpace industry trends and take market share as “on-mall and less value-oriented retailers like Macy’s are losing share.

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Foot traffic in mall settings, he added, “will likely continue to wane over the years ahead.”

Macy’s third-quarter report Thursday comes one day after billionaire activist investor Carl Icahn placed a $400 million bet against mall owners, reflecting his belief that struggling mall owners, facing more store closures, could find themselves unable to pay off debts, such as mortgages.

Net Sales: For the quarter ended Nov. 2, net sales were down 4.3 percent to $5.2 billion from $5.4 billion. Comparable sales were down 3.9 percent, on a company-owned basis, and down 3.5 percent, on an owned plus licensed basis.

While inventory was up less than 2 percent, that is still “well ahead of comp trend, which means markdown pressure is likely to continue into 2020,” Konik in his report said. “Retail brands that have wholesale channel exposure are likely to see Macy’s cut its order rates in 2020 as Macy’s inventory levels were elevated exiting [the third quarter].”

Macy’s cleared excess inventory from earlier in the year, positioning the company to “take a more balanced approach to sales and profit in the quarter.”

Gennette also said the company experienced a temporary impact on its e-commerce business because of now-completed work prepping for an “improved experience this holiday season.”

Earnings: Net income fell 96.8 percent to $2 million, or 1 cent a diluted share, from $62 million, or 20 cents, a year ago. On an adjusted basis, earnings per share was 7 cents.

Wall Street was expecting adjusted diluted EPS at $0.00 on sales of $5.32 billion.

Macy’s lowered annual guidance, this time expecting comparable sales, on an owned plus licensed basis, down 1 percent to down 1.5 percent, with net sales down 2 percent to 2.5 percent, and adjusted diluted EPS at between $2.57 to $2.77.

That compares with prior projections of flat to up 1 percent in comparable sales, flat for net sales, and $2.85 to $3.05 for adjusted diluted EPS.

CEO’s Take: Gennette said, “We have confidence in our holiday strategies…. We have curated an expanded gift assortment with great values in all categories and developed a powerful marketing calendar for both our best and occasional customers. This holiday season, we will also have even more flexible, secure and convenient fulfillment options for our customers, including Pick Up in Store and same day delivery.”