Macy's (M) Beats Estimates With Tight Inventory Control

Macy's, Inc. (M) is trading higher by 4% in Tuesday's pre-market after posting a fourth quarter 2021 profit of $0.80 per share, much better than the $0.12 consensus, while revenue fell 18.7% year over year to $6.78 billion, beating expectations by nearly $300 million. Comparative sales fell 17% in the quarter due to ongoing stress as a result of the pandemic. The company issued in-line fiscal year 2022 guidance, expecting a profit of $0.40 to $0.90 per share on revenue between $19.75 billion and $20.75 billion.

Key Takeaways

  • Macy's posted stronger-than-expected fourth quarter earnings, fueled by tight inventory control.
  • The retailer reported an 18.7% year-over-year revenue decline.
  • The stock has exceeded Wall Street price targets.
  • Overhead supply from the January short squeeze could weigh on the developing uptrend.

Digital sales recouped a big chunk of lost in-store sales, growing 21% year over year. Digital penetration reached 44% of net sales, denoting a successful e-commerce strategy after years of false starts. Executives crowed about the strong quarter, noting that it represented the successful execution of the company's holiday strategy, from off-price to luxury. Tight inventory control played a big part in the positive outcome, dropping 25% year over year.

Telsey Advisory Group analyst Dana Telsey raised her price target on Macy's stock to $14 ahead of the news, noting, "As COVID traffic and operational headwinds persisted through the holiday season, we expect Macy's will continue to shift gears within its control such as marketing, discretionary expenses, and inventory allowing it to begin 2021 on solid financial footing. Therefore, we maintain our Market Perform rating. Our new price target assumes a 9x multiple on our FY22 EPS estimate of $1.64."

Wall Street has maintained a cautious view on the outlook for Macy's, raising the odds for higher ratings and targets after the positive quarter. Consensus now stands at an "Underweight" rating based upon 1 "Buy," 8 "Hold," and 1 "Underweight" recommendation. More importantly, five analysts recommend that shareholders close positions and move to the sidelines. Price targets currently range from a low of $4 to a Street-high $15, while the stock is set to open Tuesday's session 75 cents or so above the high target.

Tip

Inventory turnover is a financial ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing, and purchasing new inventory.

Macy's Weekly Chart (2013 – 2021)

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The stock completed a round trip into the 2007 high at $46.70 in 2013 and broke out, lifting to an all-time high at $73.61 in the third quarter of 2015. Amazon.com, Inc.'s (AMZN) rapid market share gains then ended the uptrend, yielding a steep decline that initially found support in the upper teens in 2017. A bounce into June 2018 posted the third lower high since 2015, ahead of renewed selling pressure that broke 2017 support in August 2019.

Price action hovered near new resistance into February 2020, when the bottom dropped out in a vertical downdraft that undercut 2009's bear market low by nearly 70 cents. The stock carved a higher low in October and took off in a recovery wave after positive vaccine news lifted market sentiment. The rally surged into the low $20s in late January, caught in the GameStop Corp. (GME) phenomenon, and settled back in the mid-teens, reinforcing resistance at the 200-week exponential moving average (EMA).

The pre-market uptick has reached short-term resistance around $15.75. It may be hard to sustain a rally above that level because many inexperienced traders got caught holding the bag after January's short squeeze and will be selling into rallies to recover a portion of their steep losses. As a result, it could take legitimate growth to fuel an uptrend into the $20s, but that probably isn't in the cards until at least the third quarter.

Tip

A short squeeze occurs when a stock or other asset jumps sharply higher, forcing traders who had bet that its price would fall to buy it in order to forestall even greater losses. Their scramble to buy only adds to the upward pressure on the stock's price.

The Bottom Line

Macy's is trading higher after reporting surprisingly strong fourth quarter metrics.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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