- Reports Q2 2020 earnings Wednesday, Sept. 2 before the bell
- Consensus EPS: -$1.8
- Revenue Expectation: $3.46B
When Macy’s (NYSE:M) reports its second quarter earnings tomorrow, the department store chain must show there's a plan in place to avoid bankruptcy in an environment when consumers are shunning in-store visits and sales have plunged due to the pandemic.
That won't be an easy task for the 162-year old, New York City-based retail giant. Even before COVID-19 forced the closure of shopping malls during the first quarter, Macy's has been struggling to turn around its business.
During that quarter, sales plunged 45%, prompting the company to let go about 3,900 employees, or 3% of its workforce, in an effort to cut costs. Though sales have started to recover during the second quarter, the path to full recovery is still daunting as consumers are unlikely to feel comfortable visiting bricks-and-mortar stores as long as the pandemic lingers.
Liquidity Backed By Real Estate Assets
With its sales outlook remaining uncertain, Macy’s has had little choice but to seek funding in order to survive in this downturn. In June, the retailer secured some much-needed liquidity, avoiding a potential bankruptcy by raising $4.5 billion in credit facilities, the bulk of which was backed by its real estate holdings—its physical stores—in big cities.
The Wall Street Journal cited its chief financial officer saying that Macy’s still has enough left in its real estate portfolio to do another, similar round of financing in the future if needed. Nevertheless, hurt by these uncertainties, Macy’s stock has lost about 60% of its value this year.
It closed at $6.97 on Monday, up 0.29% for the day.
The only sustainable way for this department store chain to move forward is to strengthen its online channels and reduce its physical footprint. On that front, Macy’s is showing some progress.
The company is in the process of closing 125 of its least productive stores—almost a quarter of its total holdings—over the next three years as part of a large restructuring. As well, Macy's has been spending heavily to lift its digital presence, adding more local merchandise and refreshing in-store fixtures.
That strategy has helped boost online sales, but it hasn't been enough to put the retailer on a sustained growth trajectory. In the longer term, the retailer needs to show that cost-cutting, new spending and store remodeling are breathing new life into actual sales once the pandemic-driven slowdown is over.
Bottom Line
We don’t see Macy’s stock recovering any lost ground in 2020. The pandemic has been accelerating the shift to online shopping and many analysts believe that's something that will persist even after the pandemic ends.
In our view, investors would be better off remaining on the sidelines while they wait to see how the company emerges from this downturn.