EUR 850.00 For Business Accounts Only

Morningstar | No-Moat Macy’s Has Too Many Stores in Malls, Little Momentum; Unchanged FVE

We maintain our $29.50 fair value estimate for no-moat Macy’s, based on same-store sales of negative 1% in 2020 through 2027. Macy’s has been donating apparel market share to e-commerce, discounters, and specialty stores, and we are not confident its North Star growth plan will reverse the trend. Further, we have increased our capital expenditure expectations over the next decade from our previous average of $900 million per year to $1 billion per year. We think its Bluemercury cosmetics (opening 30 stores in 2019) and Growth50 remodeling (being expanded to 100 more stores) plans will require higher investment.

We maintain our no-moat rating on Macy’s, as we do not believe it has established a sustainable intangible asset or cost-based advantage. While Macy’s has a large customer base and stores in top-tier malls, competition has reduced traffic in many lower-tier malls. Macy’s reported negative same-store sales on owned stores in 2015, 2016, and 2017. While it reversed a trend of negative same-store sales in 2018, we view its holiday (owned) same-store sales of 0.7% as evidence of a weak competitive position. We forecast Macy’s same-store sales will be positive in 2018 and 2019 but will turn negative in 2020 and remain so throughout our forecast.

We believe Macy’s is losing relevance, as consumers have many choices. Some competitors, including Costco and Target, reported better same-store sales for the 2018 holiday period, suggesting Macy’s is underperforming. Macy’s, which admits that two thirds of its customers also shop at discounters, has been forced to rely on discounts and coupons. We forecast its operating margins, which fell to 7% from 10% between 2014 and 2017, will average 6% over the next decade. Further, we forecast its sales will fall to $26 billion from $24 billion over the next decade.

We view Macy’s as slightly undervalued at current levels.

We are lowering our moat trend rating to negative from stable. We expect its competitive position will worsen over the next few years as competition from e-commerce, discount fashion stores, small format stores, and outlet stores intensifies. Moreover, while Macy’s has stores in most of the Class A malls in the U.S., it also has hundreds of stores in weaker Class B and C malls. Real estate research firm Green Street Advisors expects many of these lower-tier malls will eventually close. We forecast Macy’s adjusted ROIC, including goodwill, will average 8.7% in 2019-27, matching its estimated weighted average cost of capital of 8.7% and 230 basis points below its 10-year historical average. Moreover, we forecast an average operating margin of 6% for Macy’s over the next decade, well below its 10-year historical average of 8%. Our forecast assumes annual same-store sales of negative 1% at company-owned stores.