Macy’s Delivers on Profitability Improvements
Although traffic continues to be a headwind for the no-moat retailer, cost savings programs are on track.
Although third-quarter comparable sales declines of 3.6% indicated to us that traffic continues to be a significant headwind to no-moat Macy's (M), adjusted operating margin growth of 30 basis points to 3.3% imply that SG&A savings programs are on track, discounting and inventory headwinds are more controlled, and real estate monetization efforts are proceeding. We expect to reduce our $30 fair value estimate by $1-$2 to reflect ongoing comparable sales declines (we are currently modeling a 1% decline on average annually over the next five years versus this quarter’s almost 4% decline), but continue to think shares are undervalued given potential upside from tax reform, profitability initiatives and real estate opportunities. Therefore, we think that our estimate for operating margin declines to the mid-single-digit range (from a high-single-digit three-year average) adequately account for digital and deleverage headwinds mitigated by profitability improvements.
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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.