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Macy's second quarter profits sends ominous signal for retailers

A combination of a fashion miss, slow sell-through of warm weather clothing and an accelerating decline in international tourism led to rising inventory levels.

NEW YORK, USA — Macy's lowered its annual earnings guidance after the department store struggled with a big earnings miss during the second quarter as it was forced to slash prices on unsold merchandise.

The department store said Wednesday a combination of factors including a fashion miss, slow sell-through of warm weather clothing and an accelerating decline in international tourism led to rising inventory levels.

Macy's also raised another red flag: shoppers don't have an appetite for higher prices in a ballooning U.S. trade war with China. Macy's was forced to raise prices on some luggage, housewares and furniture to offset the costs of a 25% tariff implemented in May on those types of goods.

Retailers are bracing for a 10% tariff targeting items like toys, clothing and shoes that had been scheduled for September. Some of those items have now been delayed until December. Raising prices could be a big problem if the economy enters into a recession, analysts say.

Macy's CEO Jeff Gennette told analysts during an earnings call that the retailer will not be increasing prices as a result of the 10% tariffs. But he said the company will have to work hard with its vendor partners to offset costs if Trump goes ahead with his threat to ratchet the tariffs up to 25% in the event China won't agree to a trade deal.

Macy's is the first major retailer to report quarterly earnings and what it revealed does not bode well for the sector. Shares of major retailers slumped before the market opened. Kohl's, Dillard's and Nordstrom all fell.

Both Walmart and J.C. Penney are set to report their fiscal second-quarter earnings results Thursday. Others like Nordstrom, Target and Kohl's will report next week.

"Macy's customers are more financially suited to tariff increases so this doesn't bode well for other retailers," said Ken Perkins, president of Retail Metrics, a retail research firm. "Store will need to work hard to not pass on price increases."

Like many other stores, Macy's is under pressure to reinvent itself as shoppers increasingly buy online.  Department stores in particular face challenges as shoppers are gravitating more toward experiences and away from clothing. And if they're buying clothing, many shoppers are heading to places like T.J. Maxx and other off-price chains to buy discounted brands.

Macy's has been expanding its store labels and opening more off-price Backstage stores. It's rolled out technology that allows customers to skip the line at the register.

The company is also launching new concepts to appeal to those who like to rent or buy second-hand clothes. Macy's said it formed a partnership with resale site ThredUp to open 40 shops in its stores. Meanwhile, its upscale sister Bloomingdale's became the latest retailer to launch a rental service.

Macy's also has been closing stores and shrinking management. In February, the department store announced a multiyear restructuring program that culls its management ranks in the hopes of making the company more nimble.

Macy's reported second-quarter profit of $86 million, or 28 cents per share. That's far from the per share earnings of 45 cents that Wall Street was looking for, according to a survey by Zacks Investment Research.

Revenue of $5.55 billion also fell short.

The company reported a 0.3% increase in sales at stores opened at least a year, in line with analysts' expectations. It marked the seventh straight quarter of same-store sales increases though the growth has slowed down.

The company now expects earnings per share for the current year to be $2.85 to $3.05, down from its original forecast of $3.05 to $3.25 per shares. Analysts were expecting $3.05 per share.

Shares fell more than 15 %, or $2.95  in mid-day trading Wednesday.


Portions of this story were generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on M at https://www.zacks.com/ap/M


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