Macy’s Inc. raised the company’s guidance for fiscal 2018 after topping Wall Street’s earnings and revenue expectations in the second quarter. The company reported revenue of $5.57 billion, a decrease of 1.1 percent from Q2 2017 but ahead of analysts’ estimates by $20 million.

For the second quarter, the company reported earnings per diluted share of 53 cents, or 70 cents excluding impairment and other costs, settlement charges and losses on the early retirement of debt. This compares to 36 cents per share in the second quarter of 2017, or 46 cents, excluding settlement charges and gains on the early retirement of debt.

When also excluding asset sale gains, earnings per diluted share were 59 cents in the second quarter, compared to 37 cent per share in the second quarter of 2017, and beating targets by 8 cents.

The company reported comparable sales on an owned basis that were flat in the second quarter of 2018 compared to the second quarter of 2017. On an owned plus licensed basis, comparable sales were up 0.5 percent for the second quarter of 2018. Due to the 53-week calendar in fiscal 2017, there have been some timing adjustments in the company’s typical promotional calendar, including the shift in the spring Friends & Family promotion. As reported earlier, this shift caused a positive impact in the first quarter of 2018 of approximately 250 basis points. The shift also caused a negative impact of approximately 240 basis points in the second quarter as compared to 2017. Adjusting for this shift, the company estimates that comparable sales on an owned plus licensed basis were up 2.9 percent for the second quarter.

When looking at the first half of 2018, comparable sales on an owned basis were up 1.9 percent compared to the first half of 2017. On an owned plus licensed basis, comparable sales were up 2.3 percent for the first half of 2018.

“Macy’s delivered strong performance in the first half of the year, and we are pleased to report our third consecutive quarter of comparable sales growth. Macy’s, Bloomingdale’s and Bluemercury all performed well. It is encouraging to see the continued strengthening of our brick & mortar business where we saw trend improvements across the portfolio, led by our Growth50 stores. The combination of healthy stores, robust e-commerce and a great mobile experience is Macy’s recipe for success. We are focused on improving our customer journey every step of the way because we know that our customers expect a great experience whenever and wherever they engage with our brands,” said Jeff Gennette, Macy’s chairman and chief executive officer. “We also continue to be disciplined with inventory management, which allows us to give our customers more fashion and freshness, while increasing sales and improving gross margin.”

“Our strategic initiatives are gaining traction. They contributed to our first half results and will continue to have a positive impact on our performance in the back half of the year. This, combined with continued strong execution and a healthy consumer spending environment, gives us confidence to raise sales and earnings guidance for fiscal 2018,” continued Gennette. “We have momentum in the business, powered by our 130,000 colleagues who are focused on how best to serve our customers every day.”

Sales

Net sales in the second quarter of 2018 totaled $5.572 billion, a decrease of 1.1 percent, compared with net sales of $5.636 billion in the second quarter of 2017.

For the first half of 2018, Macy’s net sales totaled $11.112 billion, up 1.1 percent from net sales of $10.986 billion in the first half of 2017.

Operating Income and Net Income

Macy’s operating income for the second quarter of 2018 totaled $303 million, or 5.4 percent of sales, compared to $282 million, or 5.0 percent of sales, for the second quarter of 2017. Excluding impairment and other costs of $17 million, operating income for the second quarter of 2018 totaled $320 million, or 5.7 percent of sales. There were no impairment and other costs in the second quarter of 2017.

For the first half of 2018, Macy’s operating income totaled $541 million, or 4.9 percent of sales, compared to $501 million, or 4.6 percent of sales, for the first half of 2017. Excluding impairment and other costs of $36 million, operating income for the first half of 2018 totaled $577 million, or 5.2 percent of sales. There were no impairment and other costs in the first half of 2017.

Net income attributable to Macy’s shareholders for the second quarter of 2018 totaled $166 million, or 3.0 percent of sales, compared to $111 million, or 2.0 percent of sales, for the second quarter of 2017. Excluding impairment and other costs, settlement charges and losses on the early retirement of debt, net income for the second quarter of 2018 totaled $219 million, or 3.9 percent of sales. Excluding settlement charges and gains on the early retirement of debt, net income for the second quarter of 2017 totaled $141 million, or 2.5 percent of sales. When also excluding asset sale gains, net income for the second quarter of 2018 totaled $185 million, or 3.3 percent of sales, compared to $114 million, or 2.0 percent of sales, in the second quarter of 2017.

For the first half of 2018, Macy’s net income totaled $306 million, or 2.8 percent of sales, compared to $189 million, or 1.7 percent of sales for the first half of 2017. Excluding impairment and other costs, settlement charges and losses on the early retirement of debt, net income for the first half of 2018 totaled $369 million, or 3.3 percent of sales. Excluding settlement charges and losses on the early retirement of debt, net income for the first half of 2017 totaled $221 million, or 2.0 percent of sales. When also excluding asset sale gains, net income for the first half of 2018 totaled $316 million, or 2.8 percent of sales, compared to $152 million, or 1.4 percent of sales, in the first half of 2017.

Cash Flow

Net cash provided by operating activities was $544 million in the first half of 2018, compared with $546 million in the first half of 2017. Net cash used by investing activities in the first half of 2018 was $312 million compared with $210 million in the first half of 2017. Operating cash flows net of investing were $232 million in the first half of 2018 compared with $336 million in the first half of 2017.

The company repurchased approximately $344 million face value of senior notes and debentures in the second quarter of 2018. The debt repurchases were made in the open market for a total cost of approximately $354 million including premium expenses and other fees related to the transactions.

In the first half of 2018, the company’s asset sales totaled $88 million in cash proceeds compared with $150 million in the first half of 2017.

Looking Ahead – Raising Earnings and Sales Guidance

Macy’s is updating its guidance for fiscal 2018. The company now expects adjusted earnings per diluted share of $3.95 to $4.15 in fiscal 2018, excluding anticipated settlement charges related to the company’s defined benefit plans as well as impairment and other costs.

Total sales are expected to range from flat to a 0.7 percent increase in fiscal 2018. Comparable sales on an owned plus licensed basis are expected to increase between 2.0 and 2.5 percent for the second half of 2018, which translates to an annual increase of between 2.1 and 2.5 percent. Comparable sales on an owned basis are expected to be 20-30 basis points below comparable sales on an owned plus licensed basis in fiscal 2018, which is consistent with prior guidance.

Total sales guidance is provided on a 52-week basis in 2018 compared to a 53-week basis in 2017. Comparable sales guidance is provided on a 52-week basis in both 2018 and 2017.

The company’s 2018 results, 2017 results and guidance for fiscal 2018 reflect the new accounting standards related to revenue recognition and retirement benefits. Macy’s has recast its quarterly income statements and balance sheets for 2016 and 2017 to reflect adoption of these new standards.

Photo courtesy Macy’s Inc.