Where’s the American consumer? Macy’s had a weak earnings number this morning, yet another retailer reporting a tough macro environment. That was followed by a lackluster retail sales report, also this morning, even as job growth and activity surveys indicate a solid economic backdrop. Meanwhile, Amazon reported 40% same-store-sales growth in July. So the pie does not seem to be getting much bigger, but the internet companies are garnering an increasing share relative to the old guard of retail.
Macy’s missed on both EPS and sales. Macy’s had been one of the few department stores that was still a bright spot for investors, as its competitors fell victim to the secular shift towards online shopping and a relatively tepid U.S. consumer. However, management essentially acknowledged that its plan going forward is to fight for more share from its competitors since industry growth is nonexistent. The Buy Online Pickup in Store process was highlighted in today’s press release as one initiative to fight for that share.
M has stalled near $60 in the past 6 months, but even with today’s disappointing news, the stock is still trading down only 5% in the pre-market, around $56.50:
That is still above the 200 day ma, which is now around $55.50.
Part of the reason why Macy’s stock has held up so well is that its valuation is quite cheap relative to the consistency of the company’s sales and EPS growth over the past few years. It’s a 14 P/E stock with EPS growth of 10-15%. At that valuation, the question becomes whether the forward estimates are reasonably in the ballpark. Those selling the stock obviously believe that even the cheap valuation does not leave enough margin for error for a company and sector that could be in secular stagnation over the next few years. The stock’s reaction this week to the weak report will likely be a reflection of investors’ willingness to look past this quarter as a one-off against the longer-term positive trend. The alternative view is that it’s the start of a more serious earnings decline.
Another wrinkle in the story of classic American retail is the potential stabilization of JCP after a multiyear slump. After annual sales at JCP declined from $17.7 billion in 2010 to $11.9 billion in 2013, JCP is on track for its first year-over-year increase in sales in the past 5 years (analysts have modeled in $12.3 billion for calendar year 2014). Given that the increase is just a small blip ($400 million for the year), the difficulty for the other retailers is not likely to be major lost sales to JCP. Rather, the simple stabilization of JCP’s business might have hindered the growth of the other department stores, which have been steadily gaining incremental sales as JCP lost business.
Regardless, the main trend of the internet taking share from the traditional retail industry remains intact. Amidst that backdrop, retailers will have to be creative, nimble, and innovative to continue to attract physical customers to their stores. Macy’s has been ahead of the pack, but the industry’s headwinds are affecting the leader as well.