After Macy's (M, Financial) rejected an increased takeover bid from Arkhouse Management and Brigade Capital Management last month, investors were frustrated with the department store chain's decision to pursue its "Bold New Chapter" strategy instead of going private. Shares of Macy's dropped significantly, reaching yearly lows. Given the disappointment, it was crucial for the company to show early gains from its strategy. However, Macy's fell short, missing Q2 revenue estimates and reporting a -4.0% drop in comparable sales. Consequently, the stock is nearing its recent yearly lows.
- Q2 revenue fell by 3.8% year-over-year to $4.94 billion. Although EPS exceeded consensus, continuing Macy's trend of earnings beats.
- The sales miss wasn't solely due to internal issues or weak brand recognition. The consumer discretionary environment was less stable than anticipated, with consumers becoming more selective due to macroeconomic uncertainties like inflation and a complex news cycle, similar to remarks from Amazon (AMZN, Financial) during its JunQ conference call.
- Competitors like Walmart (WMT, Financial), Target (TGT, Financial), and TJX (TJX, Financial) delivered strong performances during JulQ. Target reported a +3% year-over-year improvement in apparel comps, and TJX saw positive apparel sales growth. This raises questions about whether consumers are shifting towards mass merchants and lower-priced retailers to consolidate shopping trips and find better value amid persistent inflation.
- Looking ahead, Macy's does not expect significant improvement. The company forecasts FY25 (Jan) EPS of $2.55-2.90, unchanged from its previous estimate, and revenues of $22.1-22.4 billion, slightly down from its previous $22.3-22.9 billion outlook. Same-store sales are expected to decline by 0.5-2.0%, revised from the prior guidance of down 1.0% to up 1.5%.
There were some positive aspects. Macy's saw encouraging results from its Bold New Chapter strategy, including strength in fragrances and women's ready-to-wear apparel. Customers responded well to some of Macy's private brands, which could boost revenue and margins over time as value-seeking behavior persists. Additionally, Macy's First 50 initiative, which tests new strategies in selected stores, achieved its second consecutive quarter of positive comps, with a +1.0% increase in the quarter.
Despite these positives, Macy's Q2 performance was disappointing, especially after rejecting an increased takeover offer. In July, when Arkhouse and Brigade Capital raised their offer, we noted that if Macy's chose to remain public, investors might grow impatient if the company's turnaround plan didn't yield significant gains in the coming quarters. Following a lackluster Q2 report, even more pressure is on Macy's to deliver meaningful results next quarter.
