Macy's (M) reported stronger-than-expected second-quarter sales and raised its full-year guidance, yet investors sent the stock down 4.7% on Thursday, closing at $20.50. The decline reflects a closer look at the quality of the numbers: a one-time tariff refund accounted for the entire reported margin expansion, while the core Macy's brand continued to lag its luxury peers.
Margin Gain Requires a Closer Look
The department store chain posted a reported gross margin of 41.5%, up 180 basis points year-over-year. However, management disclosed that net tariff refunds contributed exactly 180 basis points to that figure. After adjusting for the refund and the ongoing headwind from tariffs and fuel costs, underlying gross margin improved by just 10 basis points. That's progress, but hardly the step-change the headline number suggests.
The same issue permeates earnings. Adjusted diluted EPS came in at $0.63, including a $0.23 per-share net refund benefit—meaning roughly 37% of adjusted EPS was non-recurring. Excluding that, adjusted EPS was about $0.40, still 14% above last year's $0.35. The underlying business did improve, but investors were looking for a cleaner beat.
Sales Growth Was Real, But Concentrated
The top-line data were more encouraging. Net sales rose 1.1% to $4.9 billion, with comparable sales up 2.7%. Excluding the impact of fiscal-2025 store closures, comparable sales grew 1.9%. Yet the growth was heavily skewed: Macy's-nameplate comparable sales rose just 1.1%, while the Reimagine 200 stores—a key investment area—grew 1.9%. In contrast, Bloomingdale's surged 11.3% to a record second-quarter sales volume, and Bluemercury advanced 6.2%.
This validates management's strategy of investing in select stores and luxury formats, but it also highlights that the company's largest brand is still growing at a much slower pace. Other revenue streams provided some support: credit-card revenue rose 2% to $156 million, and Macy's Media Network revenue increased 8.8% to $37 million. While small relative to merchandise sales, these higher-margin businesses can disproportionately impact profitability for a retailer operating on thin margins.
Guidance Raised, But Refund Is Being Reinvested
Macy's lifted its fiscal 2026 net sales guidance to $21.675 billion–$21.825 billion from $21.5 billion–$21.75 billion, and raised its comparable-sales outlook to 1.0%–1.5% from 0.5%–1.2%. Adjusted EPS guidance was also increased to $2.15–$2.35 from $2.00–$2.20.
However, of the $116 million in tariff refunds received through the post-quarter period, only about $20 million is expected to flow through to full-year earnings. The remaining $96 million will be reinvested in the business. Guidance includes roughly $0.05 per share of refund benefit for the full year and approximately $0.18 per share of second-half reinvestment. Investors must now judge whether spending the windfall on stores and luxury brands will generate durable traffic once the refund disappears.
Valuation and Balance Sheet
At Thursday's close, Macy's shares traded at about 9.1 times the midpoint of management's adjusted EPS range. The quarterly dividend of $0.1915 implies an annualized yield of 3.7% if maintained. That valuation leaves room for skepticism, but it's not automatically a bargain when a large portion of the quarter's reported margin expansion was non-recurring.
The balance sheet provides some comfort. Macy's ended the quarter with $1.3 billion in cash and $2.4 billion in debt, with no material long-term maturities until 2030. The company also had $1.024 billion remaining under its repurchase authorization, according to its September 10 Form 10-Q. During the quarter, it repurchased about 2.24 million shares at an average price of $22.29—roughly 8% above Thursday's close.
Key Risks and What to Watch
The most immediate risk is inventory. Merchandise inventories increased 2.5%, faster than the 1.1% rise in net sales. This is manageable if fall and holiday demand holds, but could become a markdown problem if discretionary spending weakens or fuel costs squeeze consumers.
The bullish case hinges on whether the 1.9% growth at Reimagine 200 stores can spread to the broader Macy's fleet, while Bloomingdale's and Bluemercury remain strong. The bearish case wins if underlying gross margin stalls near flat, inventory outruns sales, and the refund-funded investment fails to improve traffic.
Two metrics will be more important than the next headline EPS figure: comparable sales at the Macy's nameplate and gross margin excluding refund effects. Management is scheduled to appear at the Goldman Sachs Global Consumer and Retail Conference on September 15. Any details on fall demand, promotional intensity, and the return on the $96 million reinvestment could determine whether Thursday's selloff was excessive—or an early warning about earnings quality.
