Macy's Crushes Sales and Earnings Estimates

No-moat Macy’s (M) Polaris plan appears to be working as the firm crushed sales and earnings estimates in 2021’s second quarter and raised full-year guidance. We expect to lift our per share fair value estimate of $18.70 by a high-single-digit percentage, although we view Macy’s as fully valued after its share price soared by a mid-teens percentage on the news. While Macy’s results are encouraging, the retail environment has been unusually favorable (as evidenced by similarly strong results from no-moat Kohl’s), so we are reluctant to judge Macy’s turnaround as complete and still believe it lacks a sustainable competitive advantage.

Against an easy comparison, Macy’s comparable (owned) sales jumped about 61% in the quarter, well above our 40% estimate. More importantly, same-store sales increased nearly 6% versus 2019’s second quarter as digital’s share of sales increased to 32% from 22%. This result affirms Macy’s decision to downsize its store base by about 10% over that span, although the rising e-commerce (even as stores are fully open) suggests that it still has too much selling space.

Macy’s reported a gross margin of 40.6% in the quarter, 340 basis points above our 37.2% estimate, as the strong sales and low inventory translated into good pricing. Moreover, while its selling, general, and administrative expenses were about 1% above our forecast, its operating margin came in at a very high 10.6% as the Polaris expense cuts have boosted sales leverage. For comparison, Macy’s 2019 second-quarter operating margin was below 3%.