Macy’s Earnings Preview: Holiday Sales and Ongoing Store Closures

Retailer Macy’s reports fourth-quarter earnings before market open on Tuesday, February 27. Here’s a look at what might be expected from its holiday quarter.

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An assortment of retailers are set to report results over the next few weeks. One of the first ones up is Macy’s (M), which is scheduled to report fourth-quarter earnings before market open on Tuesday, Feb. 27.

M released its sales results for November and December at the beginning of January. Comparable-store sales (on an owned plus licensed basis) increased by 1.1%. This was a reversal from the 3.6% decline the company reported for the third quarter. 

At the same time M released sales for the holiday period, it also said that it would be closing 11 stores in early 2018. This brings its total store closures to 81 out of the 100 planned closures the company announced in August 2016 as part of its ongoing restructuring efforts.

In addition to the 11 store closures, M said it would continue to take steps to further streamline non-store functions and make staffing adjustments across stores. Management said it expects this will generate annual expense savings of $300 million, starting in fiscal 2018, but the company will take a one-time charge of approximately $160 million in Q4 as a result of these activities.  

For the fourth quarter, M is expected to report adjusted earnings per share (EPS) of $2.69, up from $2.02 in the prior-year quarter, on revenue of $8.71 billion, according to third-party consensus analyst estimates from the Earnings Analysis tab on the thinkorswim® platform. The $234 million in gains from the sale of the company’s Union Square Men’s building is expected to boost adjusted EPS by $0.58 in the quarter, according to management.

One of the areas that analysts are likely to hone in when the company reports is on management’s forward guidance. There was some optimism expressed with M’s improvement in comp sales in the holiday period. But the big question remaining, according to many analysts, is whether or not this was just a one-off improvement, or if the company will be able to return to consistent comp sales growth.

On a broader level, there has been a lot of inconsistent performance among different retailers. January retail sales in the U.S. unexpectedly dropped when the Commerce Department released figures on Feb. 14. This was the biggest decline in almost a year and December’s figures were also revised downward. Some analysts saw this as a sign that there were retailers that were struggling to maintain momentum after stronger-than-expected retail results in November.

Macy’s Trading Activity

At the start of the year, the stock had a negative correlation to the S&P 500 (SPX). Since mid-January, that correlation reversed and the stock, for the most part, has been trading more in line with the SPX. For most of February, M has had around a 90% correlation to the SPX. 

Macy's Stock Chart

MACY’S IN 2018.

Macy’s (M) dropped to a low of $22.47 with the recent stock selloff. Shares have since rebounded quite a bit over the past few weeks and closed at $26.17, pretty much where it started 2018 at. Going back to the start of 2017, the stock is down 19.33%, compared to a 14.39% increase in the S&P 500 (SPX) over the same timeframe. The bottom chart shows Macy’s correlation with SPX. Chart source: thinkorswim® from TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

The options market has priced in an expected share price move of 3.5% in either direction around the earnings release, according to options data on the thinkorswim® platform. Implied volatility is at the 76th percentile as of this morning.

In short-term trading at the Mar. 2 weekly expiration, calls have been more active at the 26 and 26.5 strike prices. There has been some higher activity at the 28.5- and 29.5-strike calls, although these are pretty far out of the money. On the put side, the 25.5 strike has been the most active with volume of 3,843 contracts during yesterday’s trading session.

Further out at the Mar. 16 monthly expiration, calls have been active at the 27 and 27.5 strike prices. Those strikes had volume of 2,494 contracts and 10,229 contracts, respectively, during yesterday’s session. Again, there was some heavier trading in the 29.5-strike call. Trading has been lighter on the put side and spread out over quite a few strikes.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

There are some other major retailers set to release quarterly results over the next few weeks. Kohl’s (KSS) is scheduled to report before market open on Thursday, Mar. 1.  Department store Nordstrom’s (JWN) is scheduled to report the same day after market close. And big-box retailer Target (TGT) reports before the open on Tuesday, Mar. 6. If you have time, make sure to check out today’s Market Update for a look at what else is going on.

Good Trading,
JJ
@TDAJJKinahan

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