Macy's (M) shift to online sales might be squeezing its profits

Macy's CFO: We'll control expenses and invest

CINCINNATI - Disappointing earnings results at Macy’s Inc. made investors nervous on a number of fronts Wednesday.

Macy’s second-quarter earnings rose 11 percent to 80 cents per share, but Wall Street analysts were expecting 86 cents. Sales increased 3.3 percent to $6.27 billion, but that was $30 million short of analyst expectations.

Macy’s shares fell 5.5 percent to close at $56.47.

Because Macy’s rarely falls short of Wall Street expectations, some fear more bad news is on the way – with several big retailers slated to deliver earnings results later this week, including Walmart, Kohl’s, J.C. Penney and Nordstrom.

Some retail watchers theorized that consumers haven’t yet emerged from their post-recession stupor and the economy may not be rebounding after all.

As if that’s not enough, at least one expert sees a bigger problem in Macy’s results.

“The shift to online retail is happening faster that most people expected. They’re spending a whole lot of money to catch up on the Internet,” said Rahul Sharma, founder and managing director of NeevCapital, a London –based consulting company.

That could be a big problem for brick and mortar retailers like Macy’s, which has 840 stores and 150 million square feet of retail space. The company has been gradually reducing retail space – shedding 4.5 million square feet since 2010. At the same time, it is investing heavily in distribution centers and technology to better enable what it calls omnichannel shopping.

That means ordering online and then picking up the merchandise in stores. It means shopping in stores, then ordering a different size and color on mobile phones. It means shipping inventory from Chicago to make a sale in Miami. As omnichannel shopping grows, Sharma thinks Macy’s will find it harder to support its brick and mortar infrastructure.

“Most of retail was built on the platform that people were going to come to the stores,” he said. Macy’s has been faster to adapt than other retailers, but he still thinks the shift “is costing them … more than they expected.”

Sharma said Macy’s Chief Financial Officer Karen Hoguet admitted as much when she told an analyst that Macy’s is no longer pursuing a 15 percent goal for earnings before depreciation, interest, taxes, depreciation and amortization, or EBIDTA.

“We are still comfortable with 14 percent and we have taken 15 percent out of our discussion,” she said. “You wouldn’t want us to get to 15 because it would require not investing in the business the way I think we should to get the growth.”

Sharma sees that as “another signal that the Internet is moving a little bit faster and the margin is melting.”

Macy’s spokesman Jim Sluzewski said 14 percent has been Macy’s EBITDA goal “for several years now” and the company hasn’t altered its full-year earnings guidance for 2014.

But that didn't keep analysts from asking five questions about Macy's margins.

The company announced a first-quarter restructuring initiative that will eliminate 2,500 jobs and reduce annual expenses by about $100 million. The cuts, announced in January, are expected to result in a small net gain of local jobs and enable the shift to omnichannel retail.

“We will continue to invest and there's different parts of the investment,” Hoguet told analysts Wednesday. “The first would be how to make our strategies between and stores and the systems work well together. That's one piece of investment. You've got the warehouses that we've been investing in. As you know, we just started building a new one in Tulsa. So those will continue. You'll have store technology, which we're testing like crazy and will continue to test and roll out things that work. So I think you should assume that omnichannel and technology investments are going be an ongoing part of both our capital budget and also our expense.”

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