Morningstar | Macy’s Executes on North Star Strategy in 3Q, but Long-Term Thesis Remains Intact; Shares Overvalued
No-moat Macy’s continued to execute on its North Star strategy review after posting solid third-quarter fiscal 2018 results. Macy’s results were driven by continued strength in its digital business (double-digit growth, and mobile app sales should hit $1 billion in 2018) and comparable-store sales (up 3.3%). As a result, management again raised full-year fiscal 2018 guidance, now expecting comparable sales of 2.3%-2.5% (up from 2.1%-2.5% and our 2% estimate prior) and EPS $0.15 higher at the midpoint ($4.10-$4.30), outpacing our $4.09 estimate. However, we don’t plan a material change to our $29 fair value estimate, as we continue to believe the firm faces a highly competitive retail industry, including quick-turning fashion trends, nonexclusive products, and an overpenetrated retail environment. We don’t intend to alter our long-term outlook for a 1% sales decline (driven by weak comparable sales) on average over the next five years and operating margins falling to 5% by fiscal 2021.We are encouraged by Macy’s optimizing its store base while growing its digital presence through the buy-online-ship-to-store initiatives and the Growth50 remodels. On the loyalty side, Macy’s program that leverages access to events in their entertainment and events business (Macy's Thanksgiving Day Parade, concerts, fashion shows, cooking classes) for the most loyal customers is a driver for the 2 million new members that have joined since the beginning of the year. These customers on average visit stores more often and spend more, according to management. We surmise that these factors led to more full-priced selling, which aided in the 2.6% increase in average unit retail, validating our expectation for 20 basis points in gross margin expansion for the year to 41%. However, we contend that the firm is at the mercy of secular issues, and while loyalty program adoption has been strong, other retailers can replicate the offerings, thus not providing a long-term competitive advantage.
Macy's is an omnichannel retail organization operating stores, websites and mobile applications under three brands (Macy's, Bloomingdale's and bluemercury) that sell merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. The company's wholly-owned bank subsidiary, FDS Bank, provides certain collections, customer service and credit marketing services in respect of all credit card accounts that are owned either by Department Stores National Bank, a subsidiary of Citibank, N.A., or FDS Bank and that constitute a part of the credit programs of the company's retail operations.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.