Investors Not Buying Macy’s Beat

Macy’s Inc (NYSE: M) once again reported better-than-expected earnings and raised its full-year outlook on Wednesday, but the retailer’s second quarter wasn’t enough to keep investors from taking profits on M stock. Shares were down 14 percent by midday Wednesday as some investors see Macy’s ballooning costs as a potential red flag.

Macy’s reported second-quarter adjusted earnings per share of 59 cents on revenue of $5.57 billion. Both numbers came in ahead of consensus analyst estimates of 51 cents and $5.55 billion. Revenue declined 1.1 percent compared to a year ago.

Same-store sales growth was also better-than-expected, but not particularly inspiring. Same-store-sales were up 0.5 percent from a year ago, ahead of Wall Street expectations for a 0.9 percent decline.

After Macy’s same-store sales declined by 4.3 percent overall in 2017, a rebound in sales growth in 2018 has been one of the major reasons Macy’s stock is up more than 60 percent year-to-date. Even in a difficult second quarter, Macy’s demonstrated that it was able to keep same-store sales growth in positive territory. The performance is an indication that Macy’s efforts to shrink its physical retail presence by closing stores and reducing its employee headcount has improved its operating efficiency.

“It is encouraging to see the continued strengthening of our brick-and-mortar business where we saw trend improvements across the portfolio, led by our Growth50 stores,” CEO Jeff Gennette said.

While the same-store sales growth in the second quarter was a surprise, Macy’s spent roughly $100 million in the first half of the year to produce that growth, a number that is making some investors uneasy.

Looking ahead, Macy’s increased its full-year EPS guidance from a previous range of between $3.75 and $3.95 to a new range of between $3.95 and $4.15. Macy’s also increased its full-year same-store sales growth guidance from a previous range of between 1 percent and 2 percent to a new range of between 2 percent and 2.5 percent.

CFRA analyst Efraim Levy says Macy’s should get credit for its proactive efforts to adapt to the evolving retail environment.

“We see…

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