Retail

Will This Holiday Season Be Macy's Big Turnaround?

Macy’s Inc. (NYSE: M) has been in total free fall since July, falling 36% from its 52-week highs. Much more important than its just-released earnings for signaling a turnaround will be its fourth-quarter earnings posted after the holiday season. That will be tough, considering that fewer seasonal workers are being hired this year than in the past.

The fourth quarter accounted for 33% of Macy’s revenue last year and 52% of its annual earnings, so to say it must perform well through the holidays is almost an understatement. Macy’s is not unique here, and despite falling 36% from highs, it is actually not the worst performing department store chain this year. Kohl’s Corp. (NYSE: KSS) is down 43% from its highs. Sears Holding Corp. (NASDAQ: SHLD) is down 46%, and Ralph Lauren Corp. (NYSE: RL) is the best of the group, down only 29%. Clearly this is a sectorwide issue, and investors are worried if the department store model will be able to bounce back.

Hopefully, Macy’s closing of 40 stores out of 790 early next year will be targeted enough that it won’t impact revenue dramatically. Management is looking to close 40 that account for 1% of revenue. Macy’s will shed 3,800 jobs saving $140 million in annual savings.

If the restructuring works as planned, it should pad its bottom line by about 10% year over year, which would mean a 25% increase in its earnings since 2012. Not bad for a company that has lost 36% of its market cap this year.

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Macy has been working on new plans to bring in new types of customers and lure them away from online competitors. A new basement “Below One” floor is dedicated to the youth and their tastes. Discount outlets are opening up in the New York area to capture the bargain shopper. In something of a new approach, Best Buy Co. Inc. (NYSE: BBY) is actually working together with Macy’s to selling electronics, combining Best Buy’s employees with Macy’s floor space. In another small but significant change, it is trying out a new concept of selling clothes via a combination of buying on line and trying on in a brick-and mortar-dressing room.

This last move may prove crucial, as it is a significant advantage Macy’s has over online retailers. Buying clothes online without trying them on is always a risk.

Given current low expectations, a decent holiday season should be enough to force a bottom in Macy’s shares. Third-quarter earnings certainly won’t spur a turnaround. The retailer earned $118 million, or $0.36 per share, well short of the $0.54 expected by analysts. Total revenue fell to $5.87 billion in the period, also falling short of estimates. Shares were down 8% in premarket trading.

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By Matt Winkler