Despite a growing economy, Macy's (M) is hurting. The Cincinnati, Ohio-based company reported depressing earnings and a sales decline yesterday. Macy's problems come in the face of optimistic forecasts for sales this holiday season.
Research firm eMarketer forecasts a 5.7% jump to $885.7 billion in sales this holiday season. Similarly, the National Retail Federation projected a 3.7% sales jump to $630.5 billion this holiday season. So, should investors expect a dismal holiday season for major retailers? More importantly, should they short Macy's?
Here are two factors to keep in mind, while evaluating these questions.
The Dollar Effect
Macy's blamed unseasonal warm weather that hurt sales of winter goods such as scarves and coats and a strong dollar that discouraged tourists from visiting the U.S. or spending their dollars there. The latter reason is especially important. A strong dollar can have an outsized influence on sales for retailers who have substantial manufacturing operations outside the United States. Major retailers, such as Walmart (WMT), have already provided guidance on a decline in profits due to a strong dollar.
Similarly, margins at H&M, again a retailer with major operations in Bangladesh, declined this quarter due to the effects of a strong dollar. In the last couple of days, the dollar has become stronger due to the possibility of a Fed rate hike in December. Thus, even if retail sales pick up (and inventory pileups decline), Macy's sales volume will need to have enough heft to offset decline in margins.
Macy's Real Estate Investment Trusts
According to a Deloitte report released earlier this year, a majority of consumers prefer in-store shopping experiences over online shopping. But, they perform prior research online before making in store decisions. The report also pointed to the declining role of locations in determining the success of brick and mortar stores. "Being in an ‘A’ location doesn’t buy the competitive advantage it did in the past. This decreased importance of the physical store location and space also leads to lower barriers for entry. With these lower barriers comes increased competition from local, regional, global, and purely online retailers," the report writers state.
Macy's owns prime real estate in several cities and investors have been clamoring for the company to create a Real Estate Investment Trust (REIT) that will unlock value from its real estate holdings and, also, provide liquid funds to the company. But the company has, so far, resisted such a move. In the short-term, a rising interest rate typically hurts real estate prices as investors move funds away from asset classes towards markets. If the Fed hikes interest rates, it will have a further adverse impact on Macy's inherent value.
The Bottom Line
Given the macroeconomic climate and rise of online commerce, the prognosis for Macy's does not look good in the short term.