Can Macy's (M) Overcome Its Dismal Outlook For Q3 Earnings?

Macy's, Inc. (NYSE:M) is scheduled to report third-quarter 2019 earnings before the opening bell on Nov 21. The brick-and-mortar retailer has had a rather tough time so far this year, with shares down 49.5% against the S&P 500’s gain of 23.3% year to date.

The company is currently troubled by its heavy debt, increased competition from online retailers and consumers’ waning interest in brick-and mortar stores.

Let us thus take a closer look at these factors and see if there’s hope for Macy’s to come up with better results in the third quarter.

Outlook for Macy’s is Rather Lackluster. Here’s Why

First, the current scenario for brick-and-mortal retailers isn’t all that favorable. This is because these stores do not offer shoppers the convenience and ease that online retailers do. For example, a customer who can find a product easily on Amazon.com, Inc. (NASDAQ:AMZN) and get it delivered at the doorstep would be less inclined to browse through aisles in a brick-and-mortar storefront.

Macy’s has been rather slow in integrating its physical infrastructure with its digital face. And at a time when online shopping is easily replacing traditional modes, fresh competition is inevitable. If Macy’s wants to stay in the game, it needs to ramp up its efforts considerably in the ecommerce space. For the time being, its failure to make significant inroads in the e-commerce space will surely affect third-quarter profit margins.

Second, Macy’s is burdened by a gruesome amount of debt, which doesn’t paint a bright picture for its third-quarter earnings. The retailer had an outstanding debt of $4.7 billion (August 2019), with just $674 million in cash. In addition, earnings before interest and taxes shed 21% in 2018. If this goes on, the retailer could find it difficult to clear its debt.

Finally, U.S. retail sales didn’t fare well in September. This could have a negative impact on Macy’s third-quarter revenues. Retail sales of department stores had dropped 15.7% in September from the month before (according to Satista) as households had cut back spending on a wide range of consumer products. A decline in new job additions in September and a dismal rise in wages were the reasons behind the low spending.

Q3 Earnings and Revenue Expectations

The Zacks Consensus Estimate for Macy’s third-quarter 2019 revenues is $5.31 billion, which is a decline from revenues of $5.40 billion reported a year ago. The Zacks Consensus Estimate for earnings is 1 cent per share, which is also a decline from the year-ago earnings of 27 cents per share.

In addition, our proprietary model doesn’t conclusively predict an earnings beat for Macy'sin the third quarter. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But in this case, the stock doesn’t fulfill any of the above-mentioned criteria. Macy’s has an Earnings ESP of -200.00%. Needless to say, the stock currently carries a Zacks Rank #4 (Sell) as well. You can see the complete list of today’s Zacks #1 Rank stocks here.

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