Can Macy’s Prudent Growth Plan Work?
We think the ultimate success that can be realized is uncertain given an overcrowded and overstored industry with many competitors pursuing similar goals.
No-moat Macy's (M) hosted an Investor Day to lay out strategic efforts to curb comparable sales declines, improve margins, reduce leverage levels, and monetize real estate assets.
Although we think many of the initiatives seem prudent (increase private/exclusive offerings, make value and promotional propositions clearer, reduce costs, and invest in digital/mobile), we think the ultimate success that can be realized is uncertain given an overcrowded and overstored industry with many competitors pursuing similar goals (especially as its deteriorating performance has not shown signs of abating up until this point).
In this vein, the timing of an inflection point in performance (both on comparable sales declines and operating margin) could languish and the magnitude of upside that can be achieved remains unclear, particularly given Macy’s has failed to amass an edge in the intensely competitive retail space.
Therefore, we remain comfortable with our 2017 estimates calling for a 3% comparable sales decline and adjusted earnings per share slightly below management guidance for a range of $3.37 to $3.62. We also intend to keep our long-term outlook calling for a 1.7% average annual decline in sales over the next five years and adjusted operating margin continuing to fall to the mid-single digits (from 7% in 2016) driven by deleverage, increased wage and shipping expenses, and limited pricing power.
Shares slipped at a high-single-digit rate, and now trade at more than a 30% discount to our $32 fair value estimate, but we’d also highlight narrow-moat Nordstrom as an attractive investment option (trading 25% below our valuation) in the space given the superior customer experience associated with the brand intangible asset, established off-price offering, and narrow curated product selection.
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Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.