Macy's holiday quarter beats Street, investors skeptical on strategy

(Reuters) – Macy’s Inc (M.N) holiday-quarter results beat analyst expectations on Tuesday, but investor skepticism around its cost-cutting strategy at a time of intense online competition sent shares down nearly 5%.

Earlier this month, Macy’s said it would close 125 stores, including those based in “lower tier” shopping malls, and explore new off-mall formats in order to trim costs and boost growth.

The Cincinnati, Ohio-based retailer, along with other department store chains, has grappled with retaining existing shoppers and attracting new ones as consumers increasingly turn to online giants like Inc (AMZN.O) and discount retailers like TJX Cos Inc’s (TJX.N) Marshalls and T.J. Maxx chains.

“The challenge with Macy’s is that it is in the struggling department store sector and many of its locations just aren’t good,” Sucharita Kodali, retail analyst at Forrester Research, said.

“But hopefully with more drop-shipping in digital, more stores-in-stores, more private label, better supply chain – that may collectively help to reverse their revenue decline,” she said.

Shares of the company were down 4.5% at $14.75 in afternoon trading.

To prop up profits and foot traffic, the 161-year-old retailer has also invested heavily in its off-price “Backstage” business and experimented with resale and rental offerings.

Some analysts were not optimistic about the cost-cutting efforts.

Retail research firm GlobalData Retail’s managing director Neil Saunders said there would be disruptions and higher expenses, and questions remained over how initiatives such as store closures and new formats would bring in gains.

There could be other headwinds as well, officials said.

Macy’s has seen slower sales at tourist-based stores due to the coronavirus outbreak that began in China, and anticipates a small impact on first-quarter sales from a dent in international tourism, executives told investors on a conference call.

The company, which operates roughly 70 stores with a strong Asian customer base, is working with vendor partners to minimize disruption, the executives said.

Fine jewelry, dresses and fragrances performed well during the reported quarter, the retailer said, while demand for fashion watches and small household items was weak.

Macy’s reported a small decline in holiday same-store sales in January, surprising investors who were bracing for a sharper drop after a profit warning citing weak international tourism and sluggish mall traffic.

“We had a solid holiday season,” though the entire year did not play out as intended, Chief Executive Officer Jeff Gennette said on a post-earnings conference call.

Excluding one-time items, the company earned $2.12 per share, beating the average estimate of $1.96.

Net sales fell 1.4% to $8.34 billion, but were a touch above analysts’ estimate of $8.32 billion.

Comparable sales at Macy’s owned and licensed stores fell 0.5% in the fourth quarter ended Feb. 1, compared with the 0.93% fall estimated by analysts, according to IBES data from Refinitiv.

Net income attributable to the company fell to $340 million, or $1.09 per share, from $740 million, or $2.37 per share, a year earlier.

The company reaffirmed its full-year forecast on Tuesday.

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