Stock Flies On Macy's Smashing Earnings

Astonishing fourth-quarter earnings from Macy's M +10.50% sent the retailer's stock sharply higher early Thursday morning following its surprise beat on Wall Street's expectations.

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Macy's (ticker: M) reportedly earned $1.88 a share on sales of $8.3 billion, adjusted for diluted shares.

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Among the analysts surveyed by FactSet, earnings per share were expected to be $1.53 on sales of just north of $8.2 billion, according to their calculations. The department store owner said that earnings would have still come in ahead of estimates without that tailwind, but earnings would have still been above estimates if the favorable settlement of the state litigation had not resulted in a 17-cent tax benefit.

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Based on its guidance for $8.16 billion to $8.4 billion, Macy's had previously predicted its revenue for the quarter would fall at the low end to the midpoint.

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Macy's chairman and CEO, Jeff Gennette, said in a statement that the company benefited from the disciplined inventory approach and compelling gift-giving strategy, which enabled it to offer fresh fashion and style at a great value to all its customers. “It was important to us to be competitive, while being measured in our promotions, to take strategic markdowns and not to chase sales that were not profitable."

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Inventory levels are now 18% below 2019 levels, down 3% from a year ago.

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In response to Macy's report, the stock market reacted in kind Thursday morning, with shares surging by 6.4% in premarket trading.

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The outlook for Macy's is helping to improve the situation. It is expected that the company will see sales of between $23.7 billion and $24.2 billion in 2023, down just slightly from last year's $24.4 billion in sales and largely in line with analysts' estimates. The company estimates that earnings per share will be in the range of $3.67 and $4.11 this year, which is a bit higher than the $3.78 consensus estimate from Wall Street.

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Taking into consideration that macroeconomic uncertainty is likely to remain in place in 2023, the company emphasizes that it is taking a "prudent approach" in assessing its prospects. In response to a 3.3% decline in the company's comparable-store sales in the fourth quarter, the company said it is expecting a decline of between 2% and 4% next year. 

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As Macy's has made significant progress in reducing inventory levels, the company has said that some overhangs will need to be addressed during the first quarter, which could cause gross margins to contract by as much as 0.2 percentage points. As a result of markdowns in the most recent quarter, the gross margin slipped from 36.5% in the year-ago quarter to 34.1% in the most recent quarter.

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In spite of this, Macy's inventory woes seem small compared to some of the challenges faced by some of its competitors. As Kohls KSS +1.20% reported on Thursday, inventory-related markdowns dragged down margins by 7.5 percentage points as a result of inventory-related markdowns.

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According to Landon Luxembourg, an analyst at consulting firm Third Bridge, Macy's has invested in the right tools in order to prevent a disastrous inventory glut in the future. “Having been able to accomplish this due to their analytical systems, the company has been able to react in real-time to shifting consumer behaviors faster than they could before. A number of other retailers have taken heavy markdowns in order to get rid of excess inventory.”