EUR 850.00 For Business Accounts Only

Morningstar | Fair Start to Year for No-Moat Macy’s but Growth Hard to Find; Shares Undervalued

Macy’s 2019 first-quarter same-store sales of 0.7% surpassed our forecast of 0.4% and the consensus forecast of a 0.2% decline. While concerns have arisen surrounding post-holiday discounting of excess inventory, we think the situation was largely resolved by early-2019. Although Macy’s first-quarter EPS of $0.44 beat our estimate of $0.38, the difference was mainly attributable to asset sales that were $13 million above our forecast. We continue to expect flat revenue in 2019 and believe Macy’s will continue to spend heavily on its remodeling plan, digital capabilities, and other initiatives. Its selling, general, and administrative expenses as a percentage of net sales of 38.4% came in 30 basis points above our forecast and represented a year-over-year increase of 80 basis points. We expect elevated expenses will result in a year-over-year decline of more than 100 basis points in Macy’s 2019 operating margin. Moreover, Macy’s guidance of $1 billion in 2019 capital expenditures represents a two-year increase of 32%. While we view its efforts to improve its mobile shopping and in-store experiences as necessary, its many online and off-price competitors are not standing still. Wide-moat Walmart and Amazon, for example, are investing in free one-day shipping offerings and no-moat Kohl’s will accept Amazon returns in all its stores. We do not think Macy’s can spend more to improve its competitive position and maintain our view that it lacks a moat. We do not expect to change our fair value estimate of $27.50. We view shares as undervalued after the recent decline.

We think expanded tariffs on imports from China represents a threat to Macy’s. Although some manufacturing has moved to Vietnam and other countries, the proposed tariffs impact nearly every major category of goods at Macy’s, including apparel, footwear, and furniture. We think Macy’s will work with vendors to mitigate the increased costs, but the full impact depends on how long the tariffs remain in place. Aside from the direct impact on Macy’s, we think prolonged tariffs could exacerbate the decline of lower-tier malls. We remain concerned that Macy’s has too much exposure to malls that are experiencing declining traffic and store closures.