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.
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.
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