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Things have been pretty darn scary in the retail sector lately. As more and more people rush to Amazon.com (NASDAQ: AMZN) to fulfill their retail needs, the brick-and-mortar stores have been struggling to keep people inside their outlets. With the economy teetering on the edge of recession, retailers have been under a lot of pressure.
That’s why Macy’s (NYSE: M) gave everyone in the sector a slight sigh of relief with its fourth-quarter earnings report on Monday. The company blew away the $1.86 consensus earnings estimate; it reported $2.09 per share. Macy’s said sales for the quarter were $8.869 billion, ahead of consensus by $26 million. That was particularly sweet after missing top line number for two straight years.
The Bad News
But amidst that good news, there was some bad news – really bad. Macy’s top line number was still down 5.5% year-over-year. Gross margins fell from 40.3% to 37.4%. Macy’s operating income plunged to $936 million from $1.364 billion, a terrible decline of over 30%. Net income fell from $793 million to $543 million. That’s a 32% decline.
That, my friends, is just awful. The full-year Macy’s earnings numbers reflected the same landscape. Sales down by $1.026 billion or 5%. Gross margin fell from 40% to 39.1%. Macy’s operating income for the full year tumbled from from $2.8 billion to $2.04 billion, or more than 27%. Net income fell by a third to $1.070 billion.
The company’s cash position is now half of what it was last year, at $1.1 billion, while still carrying almost $7 billion in debt. Operating and free cash flow fell – the former from $2.71 billion to $1.98 billion, and the latter from $1.94 billion to $1.21 billion.
Now, Macy’s isn’t going bankrupt by any means. However, these kinds of losses are indicative of an economy and retail environment that are in serious trouble. Consumer confidence is at a seven-year low. Consumer discretionary sector ETFs are flashing big sell signals.
Real Estate Options
So it is no surprise that, like the troubled Sears Holdings (NASDAQ: SHLD), Macy’s is now looking at options regarding its real estate. Macy’s is also going to aggressively cut costs, which means fewer salespeople.
Why Macy’s felt the need to spend over a billion dollars buying back stock when things are this bad should make shareholders really angry. Then again, shareholders appears to be in total denial, having sent shares up 2% after the report. Some people may say that Macy’s only trades at 12 times earnings, so it represents a bargain.
I say that is magical thinking. Net income fell by a third! A third! It is folly to think that Macy’s or any retailer like it should be in anyone’s portfolio right now. Not only are earnings terrible, but macro conditions are terrible as well.
This is the kind of report that should terrify investors. Macy’s should have sold off by 40% on this news, at least. If anything, it should signal investors that shorting the market and retail in particular is going to be a pretty good idea in the near future when people pull off the rose-colored glasses.
Worry-Free Riches
They’re owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%.