Macy's smashes profit estimates as leaner inventory lifts margins, shares jump

Reuters

Published Nov 16, 2023 07:15AM ET

Updated Nov 16, 2023 01:41PM ET

By Savyata Mishra

(Reuters) -Macy's crushed analysts' estimates for quarterly profit on lower inventories and strong demand for beauty products, sending the department store operator's shares surging as much as 14% on Thursday.

The company is the latest U.S. retailer to signal that attempts to trim inventory from 2022 highs were finally beginning to shape ahead of the all-important holiday shopping season.

On Wednesday, Target disclosed a 14% reduction in inventories and forecast a strong holiday-quarter profit.

"(We are) entering the holiday period in a healthy inventory position," Macy's (NYSE:M) outgoing CEO Jeff Gennette said in a statement.

Merchandise inventories at the Bloomingdale parent were down 6% year-over-year and down 17% compared to 2019.

Gross margins improved 160 basis points in the third quarter, driven by a 110 basis points jump in merchandise margins, bolstered by lower markdowns within the Macy's brand and reduced freight costs.

Macy's plans to be "nimble and competitive with promotions as needed", executives said on an earnings call.

Still, the company, like Target and Walmart (NYSE:WMT), provided a cautious outlook on consumer spending for the holidays.

"Looking to holiday outlook, customers across nameplates continue to be under pressure and discerning in how they spend," Tony Spring, Macy's incoming CEO, said on the call.

Credit card revenues again declined, down 100 basis points year-on-year, indicating its core middle-income consumer faced difficulty in repaying debts as interest rates climbed.

Net sales fell 7.1% to $4.86 billion, the sixth straight quarter of declines. Analysts had estimated a 7.9% drop, according to LSEG data.

"The retailer is seeing strength in its beauty and off-price offerings, which is helping to offset weakness in other discretionary categories," Insider Intelligence analyst Rachel Wolff said.