Macy's earnings top estimates, raises full-year outlook

Macy's reported first quarter results that topped Wall Street estimates on both the top and bottom lines. The retailer also raised its full-year guidance.

Morningstar equity analyst David Swartz says the quarter was "a little bit better than expected," but he notes that expectations were low and the comparable sales were favorable.

Swartz says one of the big issues Macy's (M) needs to address is operating costs, arguing that it needs to reduce costs and boost sales. He thinks Macy's will need to close more stores, but that it will take more time for CEO Antony Spring to put his turnaround plan into place.

When it comes to the $24 per share takeover offer from Arkhouse Management and Brigade Capital Management, Swartz notes that his fair value estimate is $25, so the offer is "reasonable." He doesn't think Macy's wants to sell, but thinks the company should sell "if the offer is strong enough."

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This post was written by Stephanie Mikulich.

Video Transcript

Let's talk about another trender here on Yahoo Finance and that is Macy's beating on first quarter earnings, same store sales falling just about 1.2% less than the 3% that the street had been anticipating the retailer boosting its full year guidance.

And for more on this, we wanna bring in David Swart.

He is Morningstar's Equity analyst, David.

When you take a look at the results that we're getting better than expected guidance raise, you're looking at the stock moving to the upside here on the heels of this report.

What's your first reaction to what we're seeing today?

The quarter was a little bit better than expected.

Uh Expectations are not very high, as you mentioned, the same store sales numbers were still negative but they weren't quite as negative as expected.

It was against a pretty easy comparison because the first quarter of last year was not particularly strong.

Um, so I think people were a little bit, um, uh relieved that the quarter was better than expected and also the outlook for the second quarter was a little bit better than what I expected and, and they did raise slightly the outlook for the, the full year for 2024.

What are you gonna be watching for within this outlook and, and kind of baked into your expectations for that gross margin rate for the quarter?

I mean, that was one area that investors might be lingering on a little bit here, given the, the bit of slippage we saw.

Yeah, the gross margin, I think, uh, was a little bit shy of what people may have hoped for.

Uh Generally the gross margin at Macy's hasn't really been the problem.

It's been more of the operating costs.

Uh The SGN A uh Macy's uh SGN A is just too high uh for the sales numbers that it's been posting.

And so, you know, small changes in the gross margin won't really matter that much until the company starts generating more sales growth to overcome the fixed cost.

The business Macy's has been cutting costs but ultimately, it still needs to generate higher sales growth, needs to generate higher full price selling.

Uh that will boast that will boost both the total sales and the gross margin and then allow them to overcome the fixed costs.

So as as part of that controlled management of the SGN A, do you think that this company is gonna have to close some of its location and, and, and the unprofitable locations in order to see a better impact on that gross margin rate, Macy's is closing stores, uh the new to new CEO Tony Spring who just came in earlier this year, uh, announced on the previous conference call that Macy's is gonna close 100 and 50 stores.

Uh, this was a change because Macy's had been consistently saying that it didn't need to close more stores.

Uh, but now it says that it will, uh, Macy's has said that it's gonna close stores or even at, at the current time profitable, which is again, is a change from what the company has said in the past.

Um So yeah, Macy's is gonna have to down uh Macy's has a lot of stores that are just not performing well.

The company highlighted this morning as top 50 stores uh having a a positive same store sales growth performance in the quarter and doing much better than the rest of the fleet.

But Macy's still has hundreds of stores that are ultimately not really viable in the long term and will need to be closed.

This is one of the ways that Macy's will reduce costs.

Macy's though needs to operate more efficiently in all of its stores.

David, we also have investors weighing that takeover bid from our house management and brigade capital management.

When you take a look at this print, do you think Tony Spring maybe ha has won a little bit more time in order to implement that turnaround strategy?

Well, I'm sure he didn't come in as CEO and, and want to sell the business right away.

I'm cer I'm certain that wasn't the plan.

Uh The company is gonna need time to really implement this strategy that he's been talking about.

Um since he came in as CEO a few months ago, uh it's really just started and so it's gonna take really a couple of years to really show um complete um benefit if it actually happens at all.

Uh Now Macy's though may not have that time because as you mentioned, there are groups looking to buy Macy's, they've offered $24 a share for Macy's, which I think is a reasonable offer.

My fair by estimate uh Before today's uh performance was $25 a share.

Um So the offer is a legitimate offer.

It's close to what I think is the valuation.

What I think is a fair valuation.

So Macy's does need to consider it, but I don't think that Macy's management wants to sell.

Do you think they should?

It sounds like it.

I think so.

If the, if the offer is strong enough, then yes, and I think the offer is close.

Um a house has said that it may raise its bid.

If you look at the experience of Coles, uh Coles a couple of years ago was in a similar situation.

Uh They had potential bidders for the company.

The sale did not happen and coal stock price has not recovered and this is what I wrote at the time two years ago that it was too risky not to sell a business when there's an offer on the table, you just never know when there's gonna be another one and there haven't been more offers for Coles since then.

And we don't know if there'll be more offers for Macy's.

So Macy's may think that this offer undervalues the company and you can make that argument based on the value of Macy's real estate.

But you just never know if there's gonna be another offer.

David Swartz who is the Morningstar equity analyst talking all things Macy's with us today.

We didn't even get the Blue Mercury.

It's ok. My face looks all right.

I got all the makeup on today here.

Thanks so much David.

Appreciate it.

Thank you.