Retail Apocalypse Causes Major Store to Drop 24%

Tuesday was a turbulent day on Wall Street, with most major market indexes giving up early gains by midday. Some key benchmarks posted fairly substantial declines, in large part because of macroeconomic concerns that are accompanying the highest interest rates in the bond market in more than 15 years.

High rates often cause economic pressure, and when consumers no longer have the capacity to spend, it can have a huge downward impact on retail stocks. Two well-known companies in the retail space, Dick's Sporting Goods (DKS) and Macy's (M), fell sharply on Tuesday as investors parsed their respective financial reports. What happens to these two companies for the remainder of the year could be a signal of the strength or weakness of the entire consumer economy and has huge implications for stock investors.

Dick's dives

Shares of Dick's Sporting Goods were among the worst performers in the stock market, falling 24% early Tuesday afternoon. The sporting goods retailer reported fiscal second-quarter financial results for the period ended July 29, and investors weren't pleased with the numbers Dick's put up or the forecast it made for the rest of the year.

The numbers at Dick's were mixed. Revenue of $3.22 billion managed a 4% rise from year-ago levels, with comparable-store sales gains coming in at 1.8%. However, net income plunged 23% year over year to $244 million, and that produced earnings of $2.82 per share. CEO Lauren Hobart blamed the impact of elevated levels of “shrink,” or theft, which has become more of a problem throughout the retail industry recently.

Dick's has been working to try to improve its business, but it's also still angling for more growth. The retailer opened seven new House of Sport locations during the quarter, and its business optimization study has already resulted in modest levels of layoffs. Dick's doesn't anticipate seeing major cost savings from the workforce reductions, however, because it expects to make investments in hiring for more strategic positions in the coming year.

For fiscal 2023, Dick's expects to earn between $11.50 and $12.30 per share on an adjusted basis, with comparable-store sales likely to be flat to up 2% for the year. That wasn't enough to satisfy investors looking for a stronger rebound, and the move pushed Dick's stock to its worst levels of 2023.

No parade walk for Macy's

Shares of Macy's dropped 12%, also leading a broader retail sector decline. The iconic department store retailer's second-quarter financials didn't inspire much confidence heading into the key back-to-school and holiday shopping seasons.

Macy's numbers for the fiscal second quarter ended July 29 weren't pretty, even though they weren't as bad as many had feared. Net retail sales dropped 8% year over year to $5.13 billion, with comparable sales falling 7.3% across the store spectrum. The Macy's brand itself did particularly poorly, with comps falling 9.2% among company-owned stores. Bloomingdale's posted a 2.7% drop in comps, while Bluemercury bucked the downtrend with a 5.8% comps gain.

Macy's saw delinquencies rise dramatically in its credit card portfolio, and inventory turnover levels remained roughly flat compared to year-ago levels. Gross margin fell, and adjusted net income of $71 million was down more than 70% from the second quarter of fiscal 2022.

Lastly, Macy's warned that consumers could remain weak financially. Despite having identified some cost savings, Macy's still expects comps to drop 6% to 7.5% for the full year, and net revenue of $22.8 billion to $23.2 billion producing adjusted earnings of $2.70 to $3.20 per share. For a stock that has already been under pressure throughout 2023, the news wasn't what shareholders wanted to hear.

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