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Americans are feeling good about shopping, and Macy's survival might depend on it

Business Insider | May 16, 2018, 10.13PM IST

Shoppers

Reuters/Olivia Harris

Macy's benefited from healthy consumer spending and significant improvements in international tourism.

  • Macy's share price soared after the company reported better-than-expected earnings on Wednesday.
  • Same-store sales rose 4.2% during the first quarter of 2018.
  • But analysts are skeptical as to how much this success can be contributed to Macy's new strategies and improvements rather than an industry-wide improvement in consumer spending.

Macy's stock price surged Wednesday on news of its strong quarterly results.

"Spirits are up," Karen Hoguet, Macy's longtime CFO, who announced her retirement last month, said in a call with investors shortly after the results were reported.

"It was just a terrific first quarter all around," she said.

Same-store sales rose 4.2% at Macy's Inc - which also owns Bluemercury and Bloomingdale's - beating Wall Street's 1.4% average estimate and marking its second consecutive quarter of positive same-store sales growth.

Macy's CEO Jeff Gennette said during the call that its strong results were attributed to having a healthier inventory system and avoiding heavy discounts. He also spoke of having a stronger fashion assortment and improving the mobile experience.

Alongside this, the company also benefited from significant improvements in tourism spending and continued healthy consumer spending, he said.

This was a sticking point for several analysts on the call, but Gennette was quick to talk around any questions that asked him to go into further detail about how much of the store's success during the quarter could be attributed to Macy's own initiatives versus external factors.

"Tax cuts, bonuses and good tax refunds have all been a windfall to consumers who have responded by increasing
spending. This rising tide has floated most retail boats, Macy's among them," Neil Saunders, managing director of GlobalData Retail, wrote in a note to investors on Wednesday.

CNBC's "Mad Money" host Jim Cramer hinted at this on Friday: "I think that the stronger consumer courtesy in tax reform could result in some fabulous upside surprises," he said during the show.

But while the US job market is thriving and workers' paychecks are benefiting from tax cuts, consumer spending was actually down for the first two months of the year and only increased in March and April. Macy's strong results could, therefore, be seen as more successful with this in mind.

Low bar for success

Consumer spending aside, Macy's strong results were also impacted by having a low bar for success given that same-store sales dropped by 5.2% the year before.

"While beating prior year sales was never guaranteed, with a little effort it has been relatively easy for Macy's to engineer a better performance," Saunders said, noting that these numbers were also improved by the closure of its underperforming stores, which previously "dragged down" sales numbers.

Hoguet said on the call that Macy's also benefited from moving its "Friends and Family" promotion from the second quarter to this quarter.

"The future danger is that many of these dynamics will not hold as Macy's moves through the fiscal year," Saunders wrote.

"Prior year numbers become tougher, the second quarter will lose an important event, and the
consumer finances will likely tighten. Taken in concert, this suggests that performance may well deteriorate," he added.

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