As a long-established and well-liked department store, Macy’s Inc.'s (M, Financial) recent quarterly numbers could be a positive sign for its future. During the pandemic, when most other retailers were suffering from a shortage of supplies, the company managed to stay afloat by maintaining the necessary inventory levels and not suffering from the same overstocks that troubled many of its competitors. This solid track record has set it up for continued success, despite the ongoing disruptions to the retail business.
Inflation is probably the most significant headwind for Macy’s since it is a high-end store. The company also pays dividends frequently and has a substantial share repurchase program. With a reasonably priced stock, the company looks strong moving forward.
Financials are encouraging
On Nov. 17, the company posted revenue of $5.2 billion for the third quarter, a 3.9% decline from the year-ago quarter. Comparable sales were down 1%, with online sales dropping by 9% and brick-and-mortar sales falling 1%. Earnings per share clocked in at 39 cents, a significant drop from 76 cents in the prior-year quarter.
The profits were affected by several factors, including a 230 basis point contraction in merchandise margins, a 4.3% increase in operating expenses and higher delivery costs due to increased fuel prices.
Given the significant challenges facing the retail market, the results Macy's reported begin to shine through. Although investors might initially feel that its results are unimpressive, deeper analysis reveals positives. Stepping back and examining the top and bottom lines demonstrate the nationwide retail giant made progress above expected goals. Improved performance is encouraging for Macy's shareholders and a sign of hope for other retailers looking to prosper in the coming months.
Inventory shortages helped Macy’s
Many major chains faced inventory shortages due to the bottleneck in manufacturing and shipping caused by the pandemic. Macy’s, however, did not face any issues and could charge its preferred product prices. With other retailers facing a glut of inventory, Macy’s had ideal merchandise levels.
However, with the competition offering specials to offload building stocks, Macy’s, too, will need to lower its prices through sales and promotions. The change in prices is bound to lower profitability in the short term. However, with more people buying in brick-and-mortar stores rather than ordering online, the sales effect will be partially offset due to the store avoiding high shipment costs.
Inflation remains a significant threat
With inflation steadily increasing, Macy's and other retailers now face a considerable challenge. Consumers are heeding their budget-conscious attitude and focusing more on necessities and cheaper products, even at the cost of quality and comfort. It is not that they are unwilling to pay extra for quality; it is just that they cannot afford to do so.
This presents a major issue to the high-end store model, which relies on people's willingness to pay a premium for products with better build quality or higher prestige factors such as brand name. If inflation continues to rise in the coming quarters, these companies will likely feel the pinch as consumers actively avoid purchasing anything beyond their essential needs.
Emphasis on automation
Macy’s also sells its products online and is currently automating processes to make them more efficient and help merchandise reach customers faster. Its online sales declined 9% compared to the third quarter of 2021, which may have prompted the company to fix its supply chain issues through automation.
It will be crucial for retailers to not only maintain their sales, but improve them further. A more efficient supply chain should help the company lower its online sales costs. It also shows the company is moving forward and willing to update its sales channels.
Investors get returns through dividend and share buybacks
Macy's has proven over the years that it values its shareholders, consistently paying them dividends and keeping the stock attractive with a $2 billion share repurchase program. The company repurchased $500 million of stock in 2021 alone.
With these practices in place, Macy's could be a great option for those looking to get their money back and then some. As one of the leading companies that pays dividends, Macy's is worth considering if you are looking to invest your money in a reliable source.
Takeaway
Despite the instability and volatility of the current economic landscape, Macy's has risen to the challenge. The iconic department store chain is continually innovating and adapting to the ever-shifting demands of consumers, yet remains firmly focused on its dedication to quality merchandise and sound fiscal management.
Throughout the holiday season, which is traditionally a peak sales period for Macy's and other retailers, expert analysts keep their eyes on this stalwart company, With forward-thinking strategies in place, the success of Macy's bottom line takes center stage again heading into one of its most important times of the year.
