Macy's shares fall on reduced guidance
Is the company being too modest in its expectations for the holiday season?
There might not be a Santa Claus this year for Macy's (M), at least judging from the retailer's fourth-quarter guidance.
Despite reporting a third-quarter profit that beat Wall Street estimates Wednesday, shares sold off sharply on the reduced outlook. The stock dropped 5% to close at $30.45.
Macy's reported a third-quarter profit of 32 cents per share on $5.85 billion in revenue. Wall Street was looking for a profit of 16 cents per share on $5.89 billion. Same-store sales were up 4% in the quarter. Aside from the slight revenue miss, the most important thing to note was the substantially weaker guidance for the fourth quarter.
For the fourth quarter, Macy's said it expects earnings of $1.52 to $1.57 per share. Analysts were expecting $1.66 per share.
The company said that gross margins in the fourth quarter will be hit by free online shipping, but executives predicted a "spectacular Christmas shopping season."
Chief executive Terry Lundgren was very positive on the quarter. saying "We continue to move forward in the execution of those strategies that have created a culture of growth at Macy's," he added.
Despite the concerns over a potentially weak fourth quarter, Deutsche Bank and J.P. Morgan were particularly bullish, with Deutsche Bank raising its price target to $35.
Why are the banks bullish going forward?
In a note to clients, Deutsche Bank analysts said Macy's has shown a pattern of under-promising and then over-delivering. "We've seen this movie before by Macy's and it's one of the several reasons we like the stock," the analysts wrote.
The analysts said better credit trends allowed the retailer to beat third-quarter expectations, and that fourth-quarter guidance looks conservative. "We think taking a conservative approach is intelligent here, but ultimately we think EPS could exceed $1.65," the analysts added.
So is Macy's under-promising and over-delivering here, or is this the start of something much worse?
The retailer appeals to the higher end of the middle class -- a customer base that could be concerned about issues ongoing in Europe, equity portfolios, and the job market. Lundgren has historically delivered to shareholders, as shares have returned a whopping 180% in the past three years compared with a 32.3% return in the S&P 500. Over the past year, shares have gained 27.5%, far outpacing the S&P 500 gain.
The company has been able to generate returns on equity of around 19%, so Lundgren could indeed be under-promising and over-delivering, especially as the company predicts a strong Christmas season.
Traders who believe that Macy's is sandbagging guidance might want to consider the following trades:
- Use Wednesday's 5% haircut to get into a position, or add to an existing one.
Traders who believe that the global economy will take a sharp turn for the worse may consider alternate positions:
- If this happens, middle and lower-end retailers could be hit. Consider shorting names like Target (TGT), Wal-Mart (WMT), Macy's, and J.C. Penney's (JCP).
Neither Benzinga nor its staff offer investment advice, nor do they recommend that you buy, sell, or hold any security.
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