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A Tough Year Is Ahead for Macy's as Inflation Dents Earnings

Macy's Inc.'s (NYSE:M) recent earnings report was a mixed bag, with strong results in stores offset by disappointing results from its online business. It is not the only retailer in trouble, though, as many have reported weak results. Its shares have fallen sharply in response to the results, and the company is now facing pressure to cut costs.

The department store chain reported strong results for the first quarter, but faced pressure in the second quarter as gross margins eroded. The company was forced to slash prices to clear discounted inventory, even though it meant less profit. Macy's is not the only retailer facing these challenges, as many retailers are struggling with excess inventory and competition from online retailers.


Macy's is addressing these challenges in multiple ways, including closing underperforming stores and investing in digital capabilities. However, initiatives of this nature take time to bear fruit. In the meantime, investors will likely look elsewhere for better returns.

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What went wrong in the second quarter?

Macy's exceeded expectations in the first quarter of the year. It was able to record decent numbers across the board, which was very impressive considering the wider economic slump in the retail industry.

The company received somewhat positive feedback from the public, particularly on its fiscal first-quarter performance. The company surpassed analysts' predictions and reassured investors, raising its earnings forecast for fiscal 2022. Most importantly, Macy's saw its gross margin increase by 100 basis points.

However, the second-quarter results, which were released last week, have led to a substantial change in investor sentiment. Comparable sales declined 1.5%, while earnings per share fell from $1.08 in the prior-year quarter to 99 cents. Sales dropped moderately to $5.60 billion from $5.65 billion a year ago.

A Tough Year Is Ahead for Macy's as Inflation Dents Earnings
A Tough Year Is Ahead for Macy's as Inflation Dents Earnings

It is not all doom and gloom, though. Bloomingdale's and Bluemercury, the company's luxury store chains, both posted growth in comparable sales. In addition, Macy's does not have any debt maturities before 2028.

However, the company has lowered its full-year sales guidance to between $24.34 billion and $24.58 billion from $24.46 billion to $24.7 billion. The earnings per share numbers are also down to $4 to $4.20 from the original projection of $4.53 to $4.95.

On top of that, margins decreased due to the discounting of Macy's merchandise. This issue often plagues retail chains. Many retailers are dealing with shelves full of goods that companies cannot sell because of increasing inflation and a sharp decline in consumer spending. Although inflation is slowing down, the middle-income segment will remain under pressure for the foreseeable future.

Covid-19 forced a change in strategy

When faced with an economic crisis, some people may choose not to spend money on luxury items. However, the retail industry has performed well despite Covid-19 because the major players shifted their models and adjusted their workforce, leading to smarter business practices that will help them through future challenges.

Macy's Polaris strategy in 2020 had an important digital element to it, making it easier for customers to interact with the brand. The retailer is investing in a digital transformation to enable a more seamless customer experience across all channels. It is also modernizing its store portfolio and enhancing its loyalty program to create a more personalized shopping experience. The goal of Macy's Polaris strategy is to position the retailer as a destination for fashion, living and entertaining. Macy's is investing in technology and innovation to make shopping more convenient, easy and enjoyable for customers.

The company has traditionally preferred physical stores to online sales. One of the main factors is that in a physical store, consumers are more likely to make impulse purchases. Plus, there is the shipping cost - a setback for online businesses. However, the company had to change this preference due to Covid-19-related lockdowns. Eventually, Macy's turned more of its attention to online sales, which helped it recruit new customers. It also embraced a more efficient business model and found ways to do things differently, including using its stores as fulfillment centers and reducing office space. These initiatives are very important as they will help Macy's remain competitive in the long run.

Takeaway

Macy's is a solid company, but is under pressure currently due to headwinds in the middle-income segment, which is being squeezed by inflation.

While the retailer should be able to weather the storm, investors would be wise to remain cautious.

This article first appeared on GuruFocus.