Morningstar | No-Moat Macy’s Matches Estimates and Announces Further Restructuring; Shares Slightly Undervalued
Macy’s closed 2018 with fourth-quarter numbers that were in line with holiday sales and guidance released in mid-January. It also announced further restructuring and management layoffs but provided few details. While Macy’s fourth-quarter results were typically messy ($97 million in restructuring plus other charges), its revenue of $8.70 billion and pro-forma operating income of $1.05 billion nearly matched our estimates of $8.65 billion and $1.06 billion, respectively. However, Macy’s comparable owned plus licensed sales of 0.7% in the fourth quarter did not meet pre-holiday sales expectations. We believe it will need to engage in significant discounting to move unsold holiday merchandise, likely depressing gross margins in early-2019. As Macy’s guidance of flat to 1% comparable sales in 2019 is in line with our expectation of 0.5% comparable sales for 2019, we do not expect to change our fair value estimate. We maintain our view that Macy’s lacks a moat and faces significant online and off-price competition. We view its shares as modestly undervalued.We believe Macy’s continues to suffer from declining mall traffic. While the firm has plans to deal with declining sales, including increased digital capabilities, store remodeling, and expansion of its off-price Backstage concept, its hundreds of stores in lower-tier malls continue to lose customers. On its earnings call, Macy’s mentioned that just 25% of its stores produce two thirds of its physical retail sales. This information tracks data from Coresight Research that 20% of America’s malls produce 72% of total mall sales. While Macy’s is investing in its best stores, we are unclear on its plans for the others. We view cost-cutting as positive but believe more aggressive action is necessary. Macy’s could close underperforming stores, but we do not anticipate the company will do so in the foreseeable future. We maintain our view that Macy’s competitive situation is poor and that it lacks a competitive moat.
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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