There’s One Detail About Macy’s (M) Earnings You Shouldn’t Ignore

By nearly all measures, department store icon Macy’s (M) brought home the goods regarding its third-quarter earnings report. With the major indices still seeing red against the January opener and with investors growing jittery about global recession fears, the retailer’s encouraging print couldn’t have come at a better time. Nevertheless, traders need to be cautious about a finer detail impacting M stock.

But first, the numbers that Macy’s forwarded in Q3 brought the bulls out of their hiding spot. The department store posted earnings per share of $1.23, easily surpassing the Zacks consensus EPS target of 35 cents. On the revenue front, the company rang up $5.44 billion, topping expectations by 2.13%.

In the year-ago quarter, Macy’s incurred a loss per share of 19 cents on revenue of $3.99 billion. Per Zacks, “[t]his marks the big-box retailer’s ninth straight earnings beat, with a trailing four-quarter average beat of +270%.” Following the disclosure, M stock jumped double digits, eventually closing out the Thursday session up 15%.

But it wasn’t just the Q3 performance that had people excited about the department store. Management also boosted full-year expectations for adjusted earnings. Previously on Aug. 23 of this year, Macy’s provided a guidance of $4 to $4.20 per share. Now, the company anticipates $4.07 to $4.27.

“In the third quarter, we achieved solid top line results and a strong beat to our bottom line guidance. Macy’s brand position as a style and fashion source resonated with our customers, while luxury continued to outperform at Bloomingdale’s and Bluemercury,” said Jeff Gennette, chairman and chief executive officer of Macy’s.

Like clockwork, some options traders recognized the longer-term opportunity in M stock.

The Bulls Double Down on M Stock

Following the ringing of the closing bell for the Nov. 17 session, M stock made the ranks within Barchart.com’s screener for unusual options activity. While traders piled into multiple transactions with various directional implications, one stood out.

Specifically, traders zeroed in on the $32 calls with an expiration date of June 16, 2023 – 210 days from the time of the order. Volume reached 1,614 contracts against an open interest reading of 148. The bid-ask spread as represented by the midpoint price ($1.24) came out to 14.52%, a rather wide difference. Still, as a far-expiry wager, participants have time on their side.

For the record, M stock closed at $22.67 in the open market. Therefore, shares need to rise 41.2% to be at the money. Again, given the timeframe and the encouraging data from Macy’s Q3 report, the trade might not appear particularly speculative.

To be clear, though, the current aura in the options arena for M stock is decidedly negative. Per data from Barchart.com, the put/call open interest ratio stands at 1.22. Usually, the delineation between bullish and bearish sentiment is 0.70, with figures above this level indicating that more people are buying puts than calls.

Interestingly, Wall Street analysts have remained consistent regarding their take on M stock. Three months ago, they held a “moderate buy” consensus rating, broken down as three strong buys, five holds and one moderate sell. In the current month, both the rating and the breakdown are exactly the same.

Caution Should Rule the Approach for Macy’s

Given the positive update regarding the full-year outlook, the above statistics may change – and soon. However, investors may want to avoid taking the seemingly logical path of bullishness toward M stock.

While management may be optimistic about the strength of the consumer economy – particularly noting the bump up in luxury goods demand – this narrative runs counter to hard data. With recession fears rising and layoffs (especially in the white-collar technology sector) booming, the upcoming holiday season might not be as joyous as Macy’s might think it will be.

More importantly, M stock may have been a beneficiary of fortuitous timing. During the first half of this year, the purchasing power of the dollar declined a staggering 5.34%. However, from July through October, the currency eroded only 0.6%. As well, the really harsh layoffs weren’t announced until just recently.

This means that for a small window of time in Q3, shoppers experienced the benefits of deflationary forces (lower consumer prices) without the consequences of said forces (layoffs). Moving forward, the retail sector will probably benefit from even lower prices, assuming the Federal Reserve continues hiking rates. But those lower prices will now be aligned with increasing velocity of layoffs.

Therefore, at best, the net impact will be nil for M stock. However, it’s also possible that Macy’s could incur a net negative impact given that nothing scares consumers more than the prospect of job losses. Ultimately, then, investors are better served remaining cautious and skeptical.

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