Why Macy’s Stock Dropped Today

Shares Macy’s (M -12.06%) pulled back today after the department store operator posted weak second-quarter sales despite strong profits. Shares were down 12% as of 11:24 a.m. ET as a result.

Macy’s keeps shrinking

The retailer reported a 3.8% drop in revenue to $4.9 billion, well below estimates of $5.12 billion. Comparable sales fell 3.3%, showing the company continues to shed customers in a tough retail environment.

Comparable sales fell 4.5% for Macy’s own-brand. Bloomingdale’s fell 1.1%, but BlueMercury, its beauty brand, rose 2%.

Image source: Getty Images.

The weak top-line performance comes after Macy’s rejected another buyout offer last month. The company still appears to be struggling to put together a long-term turnaround strategy.

Macy’s, however, improved on the cost side, as gross margin rose 240 basis points to 40.5% on lower discounts compared to a year ago. Selling, general and administrative (SG&A) expenses fell $7 million to $2 billion, but rose 120 basis points on a percentage basis to 38.7% on the back of a drop in sales. Nevertheless, it was enough to double GAAP operating income from $124 million to $222 million.

On the bottom line, adjusted earnings per share rose $0.26 to $0.53, beating the consensus estimate of $0.30. CEO Tony Spring called the results “strong earnings results in a challenging consumer environment.”

What’s next for Macy’s?

Investors also appeared disappointed with the forecast, as Macy’s lowered its full-year revenue forecast from $22.3 billion to $22.9 billion to $22.1 billion. It also lowered its comparable sales forecast to minus 2% and minus 0.5%, though it maintained its adjusted earnings per share forecast of $2.55 billion to $2.90.

The company’s shares are cheap given their price-to-earnings ratio of about 6, but their price is unlikely to rise until the company returns to sales growth.