Macy’s (M -2.26%) reported fiscal 2022 second-quarter earnings before the markets opened on Tuesday, Aug. 23. The figures impressed the market, and the stock was up by 5% on the announcement day.
Macy’s has benefited from widespread inventory shortages since the pandemic’s onset. That had allowed it to sell products at higher prices due to decreased competition. However, that trend is ending as several retailers over-invested in products.
Let’s look at the Q2 figures that have the market buzzing about Macy’s stock.
Macy’s lowers 2022 earnings per share forecast.
Notably, Macy’s comparable store sales, which excluded the impact of new store openings and closings, decreased by 1.5% in the quarter that ended on July 30. The year-over-year decrease follows a difficult comparison from last year when sales soared as the economic reopening brought shoppers back to stores. Moreover, consumer behavior has quickly changed again.
Rising inflation is forcing people to pay more for essentials like food, gas, and rent. That’s leaving less money available for discretionary purchases like clothing. It was a sharp reversal after several quarters where retailers complained that they could not secure enough products to satisfy insatiable consumer appetites. Problematically, retailers, including Macy’s, jumped over themselves to increase inventory purchases to ensure shelves were stocked with the items customers wanted.
Supply chains were not only hurt by manufacturing shortages but also shipping delays. An outbreak at a critical seaport could delay shipments for weeks. Therefore, retailers were forced to order products earlier than usual. The longer lead time increases the risk that customer demand changes away from the types of products requested.
As of July 30, Macy’s held $4.6 billion of inventory. That was up from $4.3 billion at the same time the previous year. Investors are watching this metric more closely as consumer behavior is quickly evolving. The risk to Macy’s is that it will get stuck with products that customers are not interested in buying. To get ahead of the issue, Macy’s started cutting prices and increasing promotions to shed some undesired items.
Several weeks earlier, Target (TGT -2.72%) and Walmart (WMT -1.55%) announced they, too, would be slashing prices because they ordered products that were hot during the earlier stages of the pandemic but not so much anymore. The price cuts industry-wide are bad news for profitability.
Indeed, Macy’s gross profit margin decreased by 170 basis points in its most recent quarter. Management expects these poor conditions to continue for the rest of the year and lowered profit forecasts for the whole of its fiscal 2022.
Macy’s updated its earnings-per-share outlook for 2022 as of Aug. 23 to $4.00 to $4.20. That was down from the previous expectation of $4.53 to $4.95 given just a few months earlier on May 26.
Not so bad
With all that bad news, why did Macy’s stock jump by 5% on the day of the announcement? Likely because expectations were for its quarter to be worse. After digesting the results from Walmart, Target, and others, the market had been aware of the deteriorating conditions for retailers. The less harmful impact on Macy’s was a sigh of relief to investors.