Macy’s doesn’t sound too worried about the Delta variant

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The COVID-19 Delta variant is putting pressure on consumer spending and confidence. Some retailers such as Home Depot have warned that sales are slowing a bit compared to the blistering pace earlier in the year. 

But one wouldn’t know any of these factors were in play in reading the very confident sounding second quarter earnings report from department store Macy’s (M). Whether this super bullish tone comes back to bite executives — and investors for believing it — in the rear this fall is something to watch closely as variant fears remain front and center as a consumer spending headwind.

Amid consumers rebuilding their closets and becoming more mobile post vaccination, Macy’s saw second quarter same-store sales surge 62%. Naturally, the gain reflects the impact a year ago of store closures at the height of the pandemic. 

Gross profit margins rose 180 basis points from the second quarter of 2019 as Macy’s pulled back on promotions amidst the summer apparel buying frenzy. The company also benefited from its continued focus on keeping inventory abnormally low to boost margins — inventory levels fell 14.5% from a year ago in the quarter.

Here is how Macy’s performed in the second quarter compared to Wall Street analyst estimates:

Macy’s also struck an upbeat note on the balance of the year, which of course includes the all-important holiday shopping season. The retailer raised its full-year adjusted earnings per share guidance to $3.41 to $3.75, from $1.71 to $2.12 and $2.27 previously. 

Shares of Macy’s rose about 8% in pre-market trading on Thursday. The stock is down 55% over the past five years, badly lagging the S&P 500’s 103% gain.

The quarter wasn’t too surprising given positive earnings results recently from vendors such as Levi’s and V.F. Corp. But it was Macy’s interesting decision on two fundamental fronts that likely has caught investors by surprise. 

First, the company reinstated its $0.15 a share dividend. The total payout annually: $200 million. Macy’s suspended its dividend to preserve cash in March 2020. Meanwhile, Macy’s uncorked a new $500 million stock buyback plan. 

In both instances, Macy’s cited a healthy cash position for taking both moves. 

Pedestrians pass the Macy’s store in the Downtown Crossing shopping area in Boston. Americans cut back on their spending last month as COVID-19 cases surged. (AP Photo/Charles Krupa, File)

The maneuvers are rather shocking in the context of where things are in the pandemic (far from stable) that is causing major volatility in consumption trends. Then there is the consideration of how bad things got for Macy’s during the pandemic (the company needed billions in debt to survive). 

One would think Macy’s would take a more cautious tone right now, instead of bringing back a costly dividend and buying back a large slug of stock. A 62% sales increase when most of your stores were closed a year ago sure makes a retail exec look like a hero come earnings day and wild-eyed on their expectations for the future. But one quarter does not make a trend, especially during a pandemic and who wants to be back in the position of cutting a dividend and suspending a buyback in 2022. 

Hopefully for the sake of Macy’s beleaguered investors, management finally has got this call correct. It hasn’t been the norm for them, however.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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