Macy's might never see daylight: analyst

Brian Sozzi
·Editor-at-Large
·3 min read

The bears are circling the carcass of wounded Macy’s (M) on Thursday after another brutal quarter amid the COVID-19 pandemic.

Shares of the department store fell as much as 5% in early trading as Macy’s said third quarter same-store sales crashed 20.2%. While the company touted a return to adjusted operating profits ($159 million) and a pop in e-commerce sales (up 27%), investors keyed in on two worrying items ahead of the crucial holiday shopping period.

First, Macy’s told the Street gross profit margins likely “peaked” for 2020 in the third quarter.

Considering Macy’s has fired thousands of people and closed a great deal of stores over the past 24-months in a major cost-cutting exercise, the Street was likely expecting more leverage on the profit margin line even on depressed sales levels. No go on that one for Macy’s, or so it appears, amidst what will be an ultra competitive holiday season that could require higher than planned discounting for the retailer.

Meanwhile, Macy’s same-store sales decline of 20.2% masked severe weakness at the store level.

In a slide-deck posted on its investor relations page, Macy’s noted store sales plunged 36%. Keep in mind this comes as Macy’s stores reopened for business after quarantine-related closures earlier in the year. The weak store sales in the third quarter suggests Macy’s may have problems reaching its expected goal of improved sequential adjusted operating profits in the fourth quarter as consumers stay away from stores as COVID-19 infections rise again.

All bets could be off for Macy’s on even sniffing its fourth quarter operating profit expectations if states reimpose restrictions to combat the resurgent coronavirus. Given recent developments out of some states on the lockdown front, fresh retail store closures must not be ruled out. And Mr. Market looks to be sniffing that out right now as it pertains to Macy’s.

“The outlook for holiday is depressed, and we don't see how this company or the entire department store industry can ever recover from the share losses to discount/off-price and other e-commerce players. Bottom line ... Macy's is in a tough spot,” wrote Jefferies analyst Randal Konik after Macy’s flubbed quarter.

IMAGE DISTRIBUTED FOR MACY'S -  Macy's Atlanta Great Tree is an eco-friendly, reusable tree that stands 56-feet-tall and is adorned with 45,000 multi-color sparkling LED lights that spans more than eight miles draped around the tree. To kick off the holiday season, the Great Tree was lit during a private ceremony on Thursday, Nov. 12, 2020, in Atlanta. (John Amis/AP Images for Macy's, Inc.)
IMAGE DISTRIBUTED FOR MACY'S - Macy's Atlanta Great Tree is an eco-friendly, reusable tree that stands 56-feet-tall and is adorned with 45,000 multi-color sparkling LED lights that spans more than eight miles draped around the tree. To kick off the holiday season, the Great Tree was lit during a private ceremony on Thursday, Nov. 12, 2020, in Atlanta. (John Amis/AP Images for Macy's, Inc.)

Konik added, “Secular headwinds are real, which we expect will accelerate as a result of COVID (e.g. more e-commerce stickiness). While cost savings initiatives are helpful, we believe shares will lack material upside until M's store fleet sees further rationalization, comps re-inflect, and margins recover.”

The analyst prefers shares of off-price retailer TJX Companies, as the TJ Maxx and Marshall’s owner benefits from consumers trading down to save money during the pandemic.

Perhaps the one upshot for Macy’s: It’s not nearing a cash crunch after months of working to improve liquidity levels. The company ended the third quarter with $1.6 billion in cash and $3 billion of untapped capacity in its asset-based credit facility.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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