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Macy’s Earnings Preview: Can Same Store Sales Growth Continue?

Department store Macy’s (M) reports first-quarter earnings before market open on Wednesday, May 16. Here’s a look at what might be expected from its results.

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5 min read

Shares of department store Macy’s (M) have come a long way from their 52-week low of $17.41, hitting a new 52-week high of $32.45 at the end of April. 

Since then, recent analyst notes have added some pressure to the stock ahead of M’s upcoming earnings report before market open on Wednesday, May 16.  

For Q1, M is expected to report adjusted EPS of $0.36, up from $0.24 in the prior-year quarter, on revenue of $5.43 billion, according to third-party consensus estimates. Revenue is projected to increase slightly from $5.34 billion in Q1 2017.

Analysts from Deutsche Bank recently expressed concerns that poor weather might’ve weighed on M’s sales in the quarter. When the company last reported, comparable-store sales increased 1.4%, breaking the company’s three-year streak of declines. For all of fiscal 2018, management expects comparable-store sales to be flat to up 1%.

The same week as Deutsche Bank, analysts from Morgan Stanley downgraded the stock from equal weight to underweight, dropping their price target from $27 to $25, citing operating challenges in M’s core retail business, which they say have been masked by real estate gains and private-label credit card income. 

Over the course of 2017, M reported that it generated $411 million in cash proceeds from real estate transactions. In 2018, management is expecting $340 million to $370 million in cash proceeds from real estate transactions. Through its partnership with Brookfield Asset Management (BAM), M has been in the process of selling some real estate assets, while monetizing others. On last quarter’s call, CEO Jeff Gennette said “real estate will remain a very important part of our strategy.”

Outside of the company’s real estate strategy, the company has had a variety of focuses to revitalize sales, which it dubs its “North Star strategy.” One of the points of this broader strategy is to “appeal to more value-oriented customers”. To that end, M has said it will increase its investments in Bloomingdale’s Outlet and Backstage, its discount store located within traditional Macy’s stores. In 2018, management said it plans to expand Backstage to 100 locations after rolling it out to 45 stores in 2017. 

Macy's One-Year Stock Chart

MACY’S ONE-YEAR CHART.

Even though M has recovered significantly from its 52-week low of $17.41, the stock is still trading well below where it started 2016 at. Better-than-expected Q4 results helped push the stock to a new 52-week high, but shares have been pressured over the past few weeks. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Options Trading Activity

Around the upcoming earnings release, the options market has priced in about a 7.8% stock price move in either direction according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was a bit elevated and at the 66th percentile as of this morning.

In short-term trading at the May 18 monthly expiration, calls have been active at the 30 strike prices, just out of the money. On the put side, trading has been concentrated at the 29 strike.

At the June 15 monthly expiration, there hasn’t been a lot of activity that stands out. There has been lighter volume spread out across a range of strikes mostly right around the money, although the 30-strike call has been more heavily traded in recent sessions.

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.

What’s Coming Up

This week brings a string of retail results with reports from Walmart (WMT) on Thursday morning and Nordstrom (JWN) after market close the same day. Next week, big-box retailer Target (TGT) and home improvement retailer Lowe’s (LOW) both report before market open on Wednesday, May 23. For a look at what else is going on across markets, check out today’s market update if you have time.

Good Trading,
JJ
@TDAJJKinahan

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