Macy's earnings beat estimates, but execs send warning signal on health of America's shoppers
Macy's stock dropped 8% at the market open as the department store revealed credit card delinquencies rose "faster than expected."
Yet another retail giant took a cautious outlook on consumers.
Macy's (M) posted a beat on earnings estimates on Tuesday before the market open, but the department store pointed out that its credit card business is under pressure.
In its Q2 earnings report, the company highlighted a decline in credit card revenues, "which were negatively impacted by an increased rate of delinquencies across all stages of aged balances within the portfolio."
The company said while it expected "delinquencies to rise as part of the normalizing credit environment, the speed at which the increase occurred for the company and the broader credit card industry since the company’s first quarter earnings call was faster than expected."
Read more: What the Fed rate hike means for credit cards
Net revenue came in at $5.13 billion, higher than analysts' estimates of $5.1 billion. However, credit card delinquencies dragged down the "other revenue" category for the retailer, which saw a $84 million dollar decrease from last year.
"While we have seen an increase in revenues as interest rates have risen, that has been more than offset by higher bad debt assumptions and write-offs," Macy's CFO Adrian Mitchell said on a call with investors. "These bad debt assumptions and write-offs are the result of rising delinquencies, which leads to higher net credit losses over time and contributes to increased bad debt within the portfolio."
Mitchell added that the team is working with its partner, Citibank (C), to "mitigate the rising bad debt by adjusting underwriting strategies."
The delinquencies and higher interest rates are part of a larger issue hitting Americans, with consumers struggling to pay off credit card debt, as Yahoo Finance's Janna Herron reported.
"We continue to see uncertainty in the macroeconomic environment," Macy's CEO Jeff Gennette said. "We are leveraging our robust data science tools to refine inventory composition, while reading and reacting to shifting consumer preferences to meet demand."
The company reiterated its 2023 guidance. Net sales are expected to be between $22.8 billion and $23.2 billion. Sales are expected to continue to be negative year over year, down 6% to 7.5%.
Macy's stock rose initially premarket following the results but dropped by over 8% at the market open.
The earnings rundown
Here are Macy's Q2 results versus estimates, according to Bloomberg data.
Net sales: $5.13 billion versus $5.10 billion expected
Adjusted EPS: $0.26 versus $0.13 expected
Same-store sales: -7.30% versus -9.36% expected
Gross margin: 38.10% versus 37.95% expected
Adjusted net income: 71% versus 35%
Inventories: 4,129% versus 4,425%
Inventory was down 10% year over year and down 18% since 2019, as the company cited "ongoing disciplined inventory management and the clearance of excess spring seasonal product."
Macy’s also announced Tuesday it would open four new store locations this fall with smaller footprints.
What else we're watching:
Consumers shied away from the items they bulked up on during the pandemic.
The activewear, casual, and sleepwear categories remain challenged, the company said. Meanwhile, categories like beauty — especially fragrances and prestige cosmetics — as well as women’s career sportswear and men’s tailored clothing saw strong sales in Q2.
Over at Bloomingdale's, the brand saw strength at outlet locations and in beauty, women’s contemporary and designer apparel, and shoes. However, sales of handbags, men's apparel, and dresses were "soft."
What analysts are saying post-earnings:
"Macy's (M) beat on the bottom-line, driven primarily by better SG&A, while sales and GM were inline. The biggest negative surprise was the sharp fall-off in credit income (down 40%), driven by increased delinquencies. Mgmt reaffirmed annual guidance, with a reduction in credit expectations for the year offset by better than expected 2Q results. Guidance for 3Q is well below consensus, though some of the shortfall seems to be driven by a shift in timing of shrink recognition." -Paul Lejuez, Citi
"Management is taking a cautious approach to guidance as strength in merchandise margins and expense savings is partially offset by lower credit card revenues and asset sale gain assumptions. We also highlight that M's shrink assumption has not materially changed since last quarter, although shrink is elevated versus historical levels." -Oliver Chen, Cowen
"Macy's continues to battle long-term headwinds, and even with its low valuation, we see better options in retail with strong top- and bottom-line growth." -Zachary Warring, CFRA
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Brooke DiPalma is a reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].
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