Retailer Macy's (NYSE: M) first fiscal quarter wasn't that bad, at least in terms of the analyst game. The company, which competes with mall colleagues such as J.C. Penney (NYSE: JCP) and Sears (NASDAQ: SHLD), reported net income of 2 cents per diluted share from continuing operations. The denizens of Wall Street thought the company would lose 2 cents, so management came ahead in this regard by four pennies. Bravo!
However, does this news excite me? Not necessarily. Macy's needs a little help in its sales department. First, the overall top line declined almost 3%, coming in at $5.7 billion. Second, and perhaps even more telling, same-store sales were weak during the quarter, decreasing by 2.6%. And then there's the issue of cash flow. Operational cash flow from continuing operations was excellent compared with last year's quarter since $21 million was generated this time around as opposed to $370 million being used last time around. Nevertheless, when you take into account capital spending, no free cash flow was left over in the first quarter. And cash has been decreasing on the balance sheet. Oh, and gross margin went down, too.
I wasn't too taken by Macy's current earnings report, and I'm not putting the company on my list of investment ideas right now, even though the stock closed up yesterday on the news (heck, the company didn't repurchase any shares last quarter and stated that it didn't see any more share repurchases coming for the rest of the year, so apparently the stock isn't on management's ideas list, either). I think there might be better retail investments out there, such as Wal-Mart (NYSE: WMT) or Target (NYSE: TGT). Yes, the retailer may have strong associations with Donald Trump and Martha Stewart, but I will not be blinded by such celebrity value.
Disclosure: I don't own shares in any company mentioned here; positions can change at any time.
The earnings season continues to roll on, and next week's results offer a peek at the state of fashion retailing, as a variety of companies -- from the discount to the upscale, from the hip to the pedestrian -- are scheduled to report earnings.
Analysts surveyed by Thomson Financial expect earnings growth, compared to the same period in the previous year, from Urban Outfitters (NASDAQ: URBN) to be 22.7% to 22 cents per share, from Wal-Mart Stores (NYSE: WMT) to be 9.3% to 75 cents per share, and from TJX Companies (NYSE: TJX) to be 7.5% to 40 cents per share.
Analysts expect earnings declines from the previous year from JC Penney (NYSE: JCP) by 52.9% to 49 cents per share, from Kohl's (NYSE: KSS) by 34.4% to 42 cents per share, and from Nordstrom (NYSE: JWN) by 18.3% to 49 cents per share.
In the case of Abercrombie & Fitch (NYSE: ANF), analysts expect earnings to remain flat, year over year, at 65 cents per share.
And then there's Macy's (NYSE: M), which is expected to swing to a loss of 2 cents per share, compared to a profit of 16 cents a year ago.
The sample size may be too small to define any significant trends, but the numbers do suggest that analysts expect profit declines to be deeper than profit growth, and that consumers may be more likely, given the current state of the economy, to buy clothes at Wal-Mart or TJ Maxx than at Nordstrom or Abercrombie.
The coming results will reveal if those expectations are correct.
Penney (J.C.) (NYSE: JCP) is a little timid right now in the face of the recession. According to this AP piece, CEO Mike Ullman, speaking at an analysts' meeting, is reducing the number of new locations he plans to debut this year -- look for 36 instead of 50. The CEO said that he doesn't like the unpredictability that currently exists in the macroeconomic world.
He's right to be careful. Consumer confidence might head lower from here. And considering that J.C. Penney reported terrible comps for March -- the retailer saw a decline of 12.3% -- now is probably not the time to be in expansion mode. Instead, management needs to figure out how best to connect with the mall traffic. This will necessitate new marketing campaigns that aggressively promote the brand and the shopping experience, and differentiate the chain from competitors such as Sears (NASDAQ: SHLD) and Macy's (NYSE: M). Retailers, in my opinion, often underestimate the value of investing in creative campaigns that focus more on the experience a consumer receives when he or she is in the store rather than the perceived value that a consumer has regarding the inventory portfolio.
In terms of investment potential, J.C. Penney is not a retail company that I'm seriously looking at right now. I'll wait to hear more financial updates from management; it isn't expensive at the moment, and it is certainly eons away from its 52-week high, but I just don't have a good feel for its growth potential yet. Interestingly enough, I wrote about American Eagle Outfitters (NYSE: AEO) the other day, another cheap retail stock; both J.C. Penney and American Eagle Outfitters might be considered similar stories in terms of valuation, but for me, I find American Eagle to be the more attractive candidate from a brand viewpoint and in terms of bouncing back big when the economy improves (that's my current outlook, at least). We'll have to wait and see how this mall story evolves.
Disclosure: I don't own shares in any of the companies mentioned; positions can change at any time.
Retailer 
The earnings season continues to roll on, and next week's results offer a peek at the state of fashion retailing, as a variety of companies -- from the discount to the upscale, from the hip to the pedestrian -- are scheduled to report earnings.
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