Disaster Ahead For Macy's (M); First-Quarter Losses May Clear $1 Billion

There was no doubt that the response to the coronavirus pandemic was going to cause economic disaster. Shutting down entire states' economies were going to throw everything from property taxes to individual company operations into a bizarre state of limbo that would leave operations hobbled for weeks, and as we're seeing, potentially months to come, depending on the leadership of any particular state. Macy's (NYSE: M) stock recently took a hit—though it seems to have recovered a bit—on some truly disastrous first-quarter news.

Ten-Figure Losses Do Not a Going Concern Make

The word out of Macy's was nothing short of a calamity. It not only expects sales in the first quarter to drop fully 45%, but eventually, could turn in a loss for the quarter in the billion-dollar range. The range the company offered up was anywhere from the merely catastrophic figure of $905 million to the truly awe-inspiring loss of $1.11 billion. That compares terribly against last year, where the company had net income of $203 million.

First-quarter sales, meanwhile, are still forecast to be on the positive side, between $3 billion and $3.03 billion, but that still doesn't compare well against last year's figures of $5.05 billion.

The reason, of course, was the obvious one: the legal obligation to shut down stores in the wake of the COVID-19 pandemic. Despite the thoroughly-reasonable cause, it wasn't enough to send shares careening downward fully 1.5% in pre-trading, though as of this writing, the company has recovered and is currently trading above yesterday's close. Given that a share of Macy's sells for $5.19 as of this writing, it's a good explanation for why we're seeing such frantic whipsawing in the value; one penny, either way, is a good slug of the stock's value.

Maybe It's Not So Bad?

As purely disastrous as the losses are, Macy's itself is surprisingly upbeat about things. The retailer noted during an investor presentation that liquidity wasn't likely to be a problem in terms of getting 2020 priorities set up and running. Jeff Gennette, the company's CEO, also noted that it expected business to “recover gradually,” especially as more states are beginning to reopen operations. Macy's currently has 190 of its namesake shops back open, and curbside service is up and running as well. Another 80 will be open for Memorial Day weekend, and it expects to have most of its locations operational by late June.

Yet even this positive outlook comes with some bad news. The merchandise that Macy's is looking to sell is perfectly appropriate for whatever was being sold in mid-March. That's all fine and well, but as businesses reopen and customers start venturing out again, the chances they'll be interested in buying March's apparel in May, or even June or later depending, is fairly slim.

That means Macy's is going to have to ramp up promotions in a bid to get the “stale” merchandise off the shelves and try to make room for fresh inventory. Assuming, of course, it can even get those fresh inventory, which isn't as sure a thing as it once was. Just ask anyone who's tried to buy steak for a family of six in the last few weeks.

Macy's Fixed Costs are Shockingly High

The big problem for Macy's, as noted by Neil Saunders, retail managing director with GlobalData, is that Macy's has some pretty high fixed costs. The fact that the company brought in around $3 billion in sales, but still generated a loss that's nearly a third of its sales, makes it clear that the place is just a cost sink. Even with furloughs, even with closed stores, the place is still losing money hand over fist, and it's not because it's got too many workers on the payroll.

The biggest problem, Saunders noted, is that Macy's just plain old isn't selling anything people are particularly interested in buying. Well, that's not strictly true, of course; you don't have $3 billion in sales if all you're selling is stuff no one wants. The problem here seems to be more a matter of the massive costs that Macy's has, and how much of its business is physical retail. A pandemic that shutters stores did horrible things to Macy's bottom line, and with stores like Walmart (NYSE: WMT) and Target (NYSE: TGT) doing much better thanks to online sales and “essential items”, the end result suggests that Macy's may want to tack on a grocery department going forward.