Macy’s Earnings: Progress on Key Initiatives Going Into Holiday Season; Shares Undervalued

Macy’s (owned and licensed) same-store sales fell 6.3% in the third quarter, but this result was better than our negative 8.5% forecast. Moreover, although consumer spending is challenged and the retailer does not have strong sales momentum heading into the critical holiday period, its guidance for $1.85-$2.10 in fourth-quarter adjusted EPS aligns with our current $1.97 forecast. We do not expect to make any material change to our $25 fair value estimate, leaving shares, which rallied by a mid-single-digit percentage on the report, as undervalued. We rate Macy’s as a no-moat firm given the challenged position of traditional U.S. department stores, but we think it has strengths, including its more than 40 million active customers, sizable real estate holdings, and a very large e-commerce operation.