Macy’s Q3 Results Shine

No-moat Macy’s (M) continued its string of stellar results in third-quarter 2021 as sales and margins outperformed precoronavirus levels and our expectations. We expect to lift our $20.50 per-share fair value estimate for Macy’s by a high-single-digit percentage, but view shares, up a midteen percentage on the report, as overvalued.

Against an easy comparison, Macy’s same-store sales growth on owned retail of 37% in the quarter beat our 31% forecast. More importantly, comparable sales were up 9% compared with third-quarter 2019, as average unit retail pricing jumped 12%. While impressive, we have seen strong results from many apparel retailers in 2021, as the combination of a reopening economy and low markdown rates has resulted in strong full-price sell-through. Indeed, Macy’s reported a 9% operating margin in the quarter, far above typical prepandemic third-quarter levels of 2%-3% and our 3% forecast. While the Polaris plan (which includes cost reductions, technology investments, and changes in merchandise) accounts for some of the benefit, we do not think the recent operating margins are sustainable, forecasting them at 5% in the long term.

Our adjusted EPS forecast of $1.79 for the fourth quarter aligns with Macy’s guidance of $1.67-$1.87. This guidance implies lower margins than in fourth-quarter 2019, when its adjusted EPS came in at $2.12. Macy’s cautioned that it would incur additional costs from higher labor expenses, shipping surcharges, and supply chain problems. Fortunately, despite the widespread logistical problems, the firm reported that it has adequate inventory (up 19% year over year) to meet demand during the critical holiday season.