Morningstar | Macy's Shares Falter on Tepid Holiday Performance; Shares Modestly Undervalued
No-moat Macy’s shares tumbled on results that implied a weaker-than-expected holiday season for the department store retailer. While updated full-year guidance still largely improved from the company’s initial take at fiscal year-end, nearly all metrics were revised downward from Macy’s third-quarter update, implying that the magnitude of December’s slowdown was meaningful. With guidance now for flat full-year sales (from 0.3%-0.7% prior and our 2% decline), same-store sales growth of 2% (from 2.3%-2.5% prior and our 2.4% estimate), gross margin down (rather than up), and earnings per share of $3.95-$4.00 (from $4.10-$4.30 and versus our $4.26 estimate), it appears traffic materially waned between Black Friday and the week before Christmas.While the updated guidance implies that we are likely to reduce our 2018 outlook, it fails to alter our longer-term perspective on a business that lacks differentiation, has few switching costs, and lacks the ability to take pricing consistently, given the competitive retail landscape. Our outlook calls for 1% comp and revenue declines, 5 basis points of gross margin improvement, and inflated selling, general, and administrative expenses over 2019-23 as the company continues to build out Backstage, vendor direct, and store pickup capabilities while investing in Growth50 initiatives. This leaves little opportunity for operating leverage, in our opinion, so we have Macy’s operating margin falling to around 5% over the next five years from our more than 7% estimate in 2018. Given our unchanged long-term outlook, we don’t anticipate any material change to our $29.50 fair value estimate and view the shares as modestly undervalued after their high-teens price downtick Jan. 10.
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.
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