Why Macy's stock is up despite laying an earnings day egg

Brian Sozzi

Brutal profit warnings are the new good news on Wall Street, provided you are a retailer that sells discretionary clothes like Macy's.

Macy's stock surged about 5% as of 1:030p.m. ET on Tuesday despite the department store slashing its full-year profit guidance from $4.53-to-$4.95 per share to $4.00-to-$4.20 per share.

The mood on the Street signaled a prevailing view that it could have been worse and that investors saw the warning a mile away thanks to recent revisions from Target, Walmart, Best Buy, and others.

"The market has generally been rewarding those that lower the bar for the second half," Paul Lejuez, a retail analyst at Citi, said in a note to clients. "We expect [Macy's] stock to be up today given its low multiple and lowering of the bar in the second half."

Macy's warning — not unlike the one rival Kohl's revealed last week — comes as the retailer endured a challenging quarter as consumers pulled back on non-essentials like apparel amid higher inflation.

Sales at Macy's brand stores decreased by 2.8% during the quarter while inventory ballooned by 7.7% and gross profit margins fell 70 basis points from a year ago.

Fairview Heights, IL—June 1, 2018; landscaping near entrance to retailer with corporate sign with star logo hanging on outside wall. Cincinnati based Macy’s department stores operates over 660 locations in the United States and is a common anchor tenant at many suburban malls.
Fairview Heights, IL—June 1, 2018; landscaping near entrance to retailer with corporate sign with star logo hanging on outside wall. (Getty Images) (Philip Rozenski via Getty Images)

Here is how Macy's performed compared to Wall Street estimates:

  • Net Sales: $5.6 billion vs. $5.49 billion

  • Gross Margin: 38.9% vs. 39%

  • EPS: $1.00 vs. $0.85

Even with the advance in the stock on Tuesday, Macy's shares are still down 25% year to date compared to a 13% drop for the S&P 500.

In the near term, the weak results and profit warning may renew caution on the stock.

"Following a pattern across retail, the outlook for the 2H takes into account softening trends, weakening consumer macro, excess inventory clearance/markdowns, a more promotional and competitive environment," Jefferies analyst Stephanie Wissink pointed out.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

Click here for the latest trending stock tickers of the Yahoo Finance platform

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube

Advertisement