Macy’s Earnings: Outlook Holds Despite Economy and Credit Concerns; Shares Very Undervalued

No-moat Macy’s second-quarter sales and earnings came in slightly above expectations, and the company affirmed its full-year guidance of comparable sales (owned and licensed) down 6%-7.5% and $2.70-$3.20 in adjusted EPS. However, the shares fell by a low-double-digit percentage after the report on concerns about slowing consumer spending and higher delinquencies in the credit card portfolio. Macy’s did lower its full-year guidance for credit card revenue by about 10% due to rising bad-debt expense, a sign that its largely middle-income customer base is feeling the effects of inflation. However, we anticipate only a low-single-digit cut to our $25.50 fair value estimate. We had already anticipated sizable sales declines in 2023’s second half, and we believe Macy’s strategic initiatives—including its media network, new private-label offerings, inventory control, Backstage, and cost cuts—are progressing despite the economic challenges. We view the shares, trading at a mid-single-digit P/E and offering a 5% dividend yield, as very undervalued.