Macy's quietly lays an egg — and more may be coming for retail: Morning Brief
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Macy's (M) dumped some bad news on Friday evening.
Management teams for public companies will sometimes think it's clever trying to bury bad news into a weekend in hopes investors will forget it before the opening bell on Monday.
The lame tactic rarely works.
So let's break down this textbook news dump Macy's pulled on Friday afternoon:
Net Sales: Expected to be at the low end to mid-point of guidance for $8.16 billion to $8.40 billion. Analysts were modeling for $8.31 billion in sales, according to Yahoo Finance data.
Adjusted EPS: Expected to be within the guidance range of $1.47 to $1.67. Yahoo Finance data shows analysts were banking on $1.60 a share.
Key management comment: “Based on current macro-economic indicators and our proprietary credit card data, we believe the consumer will continue to be pressured in 2023, particularly in the first half, and have planned inventory mix and depth of initial buys accordingly," said Macy's CEO Jeff Gennette. "We take a balanced approach to merchandise receipts and remain committed to offering fashion and value across nameplates and channels, with the capacity to adjust in-season buys and chase into areas of strength."
With this earnings pre-announcement, Macy's essentially issued a profit warning for the first half of 2023 in addition to telegraphing a less-than-stellar holiday season.
While Macy's inventory levels look to be in good shape despite the sales miss, look for the Street to slash their profit estimates for 2023 amid margin pressures and a more cautious consumer. The stock is likely dead money — with a downward bias — until we get evidence of a re-acceleration in consumer spending (for Macy's and other retailers, hopefully this happens before the spring selling season).
Bad fourth quarters and outlooks are probably coming from the likes of Ralph Lauren (RL), V.F. Corp. (VFC), Under Armour (UAA), and other suppliers to department stores. lf Macy's is planning first half orders cautiously, best believe rivals such as JC Penney (JCP), Kohl's (KSS), and Dillard's (DDS) are doing the same.
The negative comments on Target (TGT) last week from Wells Fargo make even more sense in the wake of this Macy's warning. Target's merchandise skews more discretionary than Walmart's (WMT), putting its numbers at greater risk inside of a sluggish spending backdrop. Along those lines, I agree with the cautious pre-earnings analysis on toymakers Hasbro (HAS) and Mattel (MAT) — lots of excess toy inventory has been seen post peak holiday season.
Macy's called out its cosmetics banner Bluemercury as solid. Walgreens (WBA) also said in its earnings release last week cosmetics performed well. The signs point to another good quarter from Ulta (ULTA).
Wall Street's vibe on retailers
"Inflation in discretionary retail, apparel, handbags, other accessories, shoes, home goods and electronics probably ran 3% in Q4 2022 and will run that or less in Q1 2023. And, they will finish the year running between 2.5% and 3% inflation. Why? We have oversupply again like we have had for the last forty years, not counting 2020 and 2021. We have reduced demand due to the expiration of COVID emergency funds going into the pockets of the consumer. We have rising interest rates reducing the demand for new mortgages and new mortgages drive the sale of home goods. We are back to 2019. We have at least marginally rising unemployment and marginally falling JOLTS. Inflation in discretionary retail is dead." -Jan Rogers Kniffen, JK Worldwide Enterprises
"Continually softer quarter to date footfall alone suggests 4Q sales could be running below or at the low-end of revenue guidance/forecasts. This trend, in addition to the fact that 1) the key 4Q shopping days are mostly behind us, 2) potentially unfavorable year over year weather is on deck for January (despite the easy Omicron lap), 3) retailers still appear to hold high inventory levels (with goals of being “clean” by year end…), & 4) select retailers/brands have already buckled as it relates to raising discounting activity above 2019 levels, heightens our fears that promotional/discounting activity likely worsens from here. This would subsequently pressure 4Q merchandise margin. That said, we admit elevated promotional/discounting activity feels mostly contemplated in conservative 4Q guidance & consensus estimates, & retailers face an easier GM compare versus 3Q." -Kimberly Greenberger, Morgan Stanley
Have a great week. Happy Trading!
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