According to Zhitong Finance, Macy's (M.US) will announce its quarterly performance for the quarter ending April 2024 before the US stock market opens on Tuesday. Analysts expect a year-on-year decline in earnings due to a decrease in revenue. Revenue is expected to be $4.82 billion, down 3.2% year-on-year; earnings per share are expected to be $0.18, down 67.9% year-on-year. Over the past 30 days, analysts' general expectations for earnings per share for the quarter have been lowered by 4.3% to the current level.
Weak US consumer spending, &#34;downgrading&#34; by the wealthy may jeopardize Macy's performance
Concerns about inflation and the job market have caused US consumer confidence to drop to a six-month low in early May, while retail sales in April remained stagnant. In this context, the macro environment in the US is not favorable for Macy's, which mainly focuses on affluent consumers. For example, due to an influx of high-income consumers to Walmart (WMT.US), the US discount retail giant, the company previously announced better-than-expected performance. As the largest retailer and private employer in the US, Walmart is often seen as a barometer of the US economy. However, during inflation, its performance generally outperforms other retailers because it sells groceries and other essential goods and has a reputation for value, catering to consumers looking to save on necessities in an inflationary and high-interest rate environment.
Consumers are prioritizing essential goods over non-essential items, weakening sales for competitors like Home Depot (HD.US) and Target (TGT.US), as well as Macy's. As high-income consumers reduce spending or seek discounts, Walmart's decisions to offer more discounts, new products, and store renovations are benefiting the company. Walmart's CEO pointed out that the purchasing patterns of low-income consumers at Walmart are similar, with them buying more groceries and other essentials than non-essential items.
Telsey Advisory Group previously forecasted in a report that due to inflationary pressures, high-income consumers are increasing their spending at Walmart stores, and the retail giant will deliver solid performance in the first quarter. Analysts wrote, &#34;Walmart should also benefit from price reductions as low-income consumers continue to purchase value-oriented goods and private label brands, while high-income consumers spend more at Walmart seeking value.&#34;
Meanwhile, Aldi recently announced it will cut prices on more than 250 items during Labor Day to help consumers cope with &#34;stubborn inflation.&#34; McDonald's (MCD.US) CEO Chris Kempczinski also told analysts during last month's earnings call that due to inflation, &#34;consumers are definitely very picky about how they spend.&#34; These are all signs of weak consumer spending in the US.
For Macy's, the company owns three high-end brands: firstly, Macy's is the largest namesake brand, operating over 500 department stores; it is the largest department store retailer in the US. Bloomingdale's is a high-end department store with over 50 locations, serving customers seeking a more upscale shopping experience and luxury brands
Bluemercury is a chain of over 150 beauty stores acquired by Macy's in 2015. It sells a range of cosmetics, as well as in-store facial and spa care.
Analysts unanimously believe that the &#34;store count - Bluemercury&#34; will reach 161 stores, compared to 158 stores in the same period last year. Analysts predict that &#34;Macy's store - Boxes (EOP)&#34; will reach 520 stores, compared to 566 stores in the same period last year. According to analysts' collective assessment, the &#34;total store count&#34; will reach 745 stores, compared to 781 stores in the same period last year.
Rising Credit Card Delinquency Rate
The rise in the credit card delinquency rate reached a record high in the fourth quarter of 2023, posing significant risks to department stores like Macy's. Although Macy's does not own its own credit card portfolio, it derives substantial revenue from profit-sharing agreements with partner banks. The increase in delinquency rates may signal trouble in this high-profit income area and foreshadow softness in future consumer spending.
Another challenge facing credit cards is the proposed cap on late fees. According to the Consumer Financial Protection Bureau, these late fees account for more than ten percent of the interest and fees consumers pay on credit cards. Currently, the late fee for the card is at least $30, making it a lucrative source of income for Macy's. The proposed legislation would significantly reduce this amount, capping late fees at $8. This is likely to result in a substantial decrease in Macy's credit card income. Concerningly, as Macy's credit card services rely on a long-standing partnership with Citigroup (C.US), it has been suggested that with the proposed cap on late fees, the profit-sharing agreement between the two companies may be adjusted to offset any revenue loss Citigroup may incur due to this regulatory change. Any changes to the profit-sharing agreement are almost certain to be unfavorable to Macy's.
In the 53 weeks ending in February 2024, Macy's net credit card income was $619 million, down from $863 million in the previous 52 weeks. Although this only accounts for 2.7% of net sales, considering its profit-sharing agreement with partner banks, this is almost all profit. As of February 2024, this accounted for 46% of the full-year pre-tax profit of $1.34 billion. Any decline in this income, whether from the cap on late fees or an increase in default rates, will lead to a significant drop in Macy's revenue, a profit risk that I believe is currently being overlooked by the market. Analysts expect the upcoming &#34;net sales - other income - net credit card income&#34; to reach $108.55 million, a 33% year-on-year decrease.
Intense Competition
Macy's operates in a highly competitive environment, facing significant challenges from traditional brick-and-mortar stores and online retailers. Its main competitors include other department stores like Nordstrom (JWN.US) and Kohl's (KSS.US), as well as non-department store companies like Amazon (AMZN.US) and Wayfair (W.US)
Competitors offer a wide range of products with strong online influence, able to quickly adapt to changing consumer preferences. Macy's response is to improve its online business and focus on omni-channel retail.
However, the rise of fast fashion and e-commerce disruptors like Shein and Temu poses a new threat to Macy's. These companies offer extremely low prices and quickly respond to changes in consumer preferences, allowing them to rapidly gain market share in a fiercely competitive retail environment. Not only targeting low-income consumers, data from Earnest Analytics shows that individuals with annual incomes exceeding $130,000 account for around 44% of Temu's sales, which is Macy's main target demographic. The impact of Temu and Shein on Macy's sales is still to be observed, but it is clear that Macy's faces intense competition in the retail sector, making it difficult to achieve higher profit margins.
Conclusion
Macy's current P/E ratio is around 8 times. Although this may not seem expensive compared to other stocks in the market, analysts currently predict that the company's earnings will continue to decline over the next three years. Considering the competition mentioned above and the risk of credit card defaults, earnings may decrease more than currently expected.
In summary, Macy's faces challenges with rising credit card defaults, potential reduction in late fees as a significant source of income. Furthermore, considering the fierce competition in the retail industry and signs of fatigue in U.S. consumer spending, Macy's outlook is not optimistic. However, there is still a possibility of a significant increase in the company's stock price, as the potential successful acquisition of Macy's by a consortium could unexpectedly boost the company's stock price, but a failed acquisition could also amplify the risk of a decline in the company's stock price

Macy's will announce its quarterly performance ending in April 2024 on Tuesday, with expected declines in revenue and earnings compared to the same period. Due to sluggish consumer spending in the United States, the macro environment is unfavorable for Macy's. In contrast, Walmart has performed well during inflation as its value-oriented products are suitable for consumers looking to save money in an inflationary backdrop. The influx of high-income consumers has also contributed to Walmart's better-than-expected performance

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