The COVID-19 pandemic has had a profound impact on retailers, many of which were struggling before the pandemic. In fact, for months, real estate investors have been on edge anticipating that the aptly named retail apocalypse may happen sooner than anyone would like, thanks to widespread store closures, sluggish department store chain sales, and too many bankruptcies to count.
That's why these same investors may be encouraged by the latest news out of Macy's (NYSE: M). The retailer, which announced massive store closures before the pandemic hit, just reported better-than-anticipated fiscal second-quarter earnings, and the news has already resulted in its stock trading higher.
Now to be clear, Macy's still reported a loss for the quarter. Specifically, net sales fell 35.8% to $3.56 billion but exceeded analyst estimates of $3.48 billion. Meanwhile, the company's loss per share came in at $0.81 versus an expected $1.77.
In all, Macy's had a net loss of $431 million, or $1.39 per share. When we compare that to its $86 million profit one year prior, that clearly looks like bad news. But let's remember that while Macy's didn't exactly do well this past quarter, it did better than expected. So real estate investors -- those who invest in physical retail locations as well as mall real estate investment trusts (REITs) -- may be breathing a sigh of relief.
Macy's also reported that it closed out the second quarter with roughly $1.4 billion in cash on its balance sheet. As such, it's approaching the latter part of the year in a fairly liquid position.
But while the news from Macy's is encouraging, when we dig deeper, it's clear that store closures will continue to be a major issue for real estate investors in the near term. And that's why they shouldn't be too quick to celebrate.
Online sales helped Macy's defy Wall Street projections
One of the reasons Macy's didn't register as large a fiscal second-quarter loss as expected was that its online sales climbed 53% from a year prior. Macy's has slowly been shifting to an e-commerce model, and it's not the only department store chain with plans to close less-profitable locations. But the retailer saw 44% less foot traffic in July, and same-store sales were down roughly 35% this past quarter, which ended August 1.
That means Macy's digital business is really what saved it from more dire numbers, which lends to the worry that department store locations may become increasingly obsolete. That's exceptionally bad news for malls, which rely on these stores as anchors to draw in customers and fill larger spaces.
Let's also not forget that as the U.S. economy grapples with its ongoing recession, holiday sales may be down this year for consumer goods across the board. Plus, shoppers may be hesitant to visit reopened stores due to the ongoing pandemic. That, too, could drive some retailers to accelerate store closure plans and shift their focus to online sales, which are generally cheaper to pull off.
As such, while Macy's reporting a lower-than-expected second-quarter loss is a good thing for real estate investors in theory, it doesn't eliminate the concern of widespread near-term retail location closures.