During times of high inflation, we expect consumers to pare back on buying what they want, such as electronics, jewelry, cars and other fanciful items.
Instead, they’re spending money on what they need: groceries, gas, utilities, etc.
This is why paying close attention to retailers during earnings season is important.
Those reports give us a glimpse into the minds of consumers now … and in the future.
Today, I’m going to focus on one retailer that took center stage with its quarterly earnings last week. Its report provided a bit of a shock, but using Adam O’Dell’s proprietary Green Zone Power Ratings system, you’ll see that the company’s stock decline wasn’t a surprise after all.
Read the Fine Print of Quarterly Reports
In a previous essay, I outlined what institutional investors are looking at in this latest batch of quarterly reports.
Yes, they want previous results compared to expectations.
But what we’ve seen is a sharper view of what companies expect down the road.
At the time of that essay, 79% of S&P 500 companies that had reported earnings, beat earnings-per-share estimates — meaning they did better in the quarter than analysts expected them to.
However, those same stocks had declined 0.5% on average immediately after reporting.
Doesn’t make a lot of sense, unless you know what institutional investors are looking at.
Beating estimates is great for a company, but in most instances, the companies whose stock declined reported negative guidance — meaning they didn’t expect to do as well in the coming quarters.
How this relates to retail is simple.
If a retailer does well, that means its sales are up and earnings are strong … that’s the good news.
But if that same retailer lowers its outlook for the next quarter or the next year, it means we shouldn’t expect strong sales to continue.
That’s bad news if you’re investing in that company’s stock.
Well, one prominent retailer got caught in that same “current earnings versus future expectations” trap. But our Green Zone Power Ratings system told us it was one to stay away from well before the market hammered it lower.
Macy’s Hit on Guidance … and Green Zone Power Ratings
Macy’s Inc. (NYSE: M) sells everything from clothes and accessories to home furnishings and cosmetics. When you think of retailers, Macy’s is likely one of the first names to pop in your head.
It’s been around since 1858 and operates brick-and-mortar stores as well as an online marketplace.
Last week, the company had, on the surface, a strong quarterly report:
- Revenue of $5.13 billion against expected revenue of $5.09 billion.
- Earnings per share of $0.26 against expectations of $0.13.
While that looks good, the company took a hit on its forward guidance. It expects its sales to drop between 6% and 7.5% for the year. Macy’s is expecting consumer spending to tumble during the last half of the year.
And Wall Street responded by sending the stock 13% lower the same day the report came out.
Of course, Green Zone Power Ratings was already waving a red flag on M stock.
M’s Green Zone Power Ratings in August 2023.
Macy’s rates 23 out of 100 on our Green Zone Power Ratings system. This means we are “Bearish” on the stock and expect it to underperform the broader market over the next 12 months.
Over the previous 12 months, M has been extremely volatile (it scores a 9 on our Volatility factor).
Fact: M has rated “Neutral” or lower since May 2023.
As I write, its beta is 1.73. This tells me the stock is much more volatile than the broader market. If the market moves down, expect M to move down by a higher percentage.
The stock also gets hit hard on our Growth factor (16).
Its one-year earnings-per-share growth rate is -8.1% and its sales growth rate is a paltry 0.05%.
Bottom line: Macy’s guidance suggests the appetite for its goods is waning as higher inflation continues.
While this isn’t good news for the stock (or others in the same industry), a look at our Green Zone Power Ratings system would show you that M was a stock to avoid, even before its quarterly report.
Stay Tuned: Green Zone Power Dividends
Tomorrow, Chad is looking to bolster his income portfolio using Adam’s powerful ratings system.
He’ll show you his plan of attack so that you can try it for yourself.
Safe trading,
Matt Clark, CMSA®
Chief Research Analyst, Money & Markets
P.S. If you want to see all of the worst-rated stocks in Adam’s Green Zone Power Ratings system, you’ve got to check out his “Blacklist.” This database of “Bearish” and “High-Risk” stocks is updated every week, so you can stay on top of what stocks you should avoid going forward. Click here to see how you can gain access to this crucial resource (along with Adams’ highest-conviction stock recommendations in Green Zone Fortunes) and set yourself up for investing success.