Can Macy's Sustain Sales Growth?
A stronger consumer, cold weather, and tax benefits were large contributors to the retailer's fourth-quarter results.
No-moat Macy's (M) posted marked improvement in the fourth quarter with positive comparable sales growth (up 1.3% on an owned basis versus a 4% average decline in the first three quarters) and adjusted operating margin expansion (up to 16.1% versus 12.5% in the prior year). Furthermore, guidance for a 0.5% to 2% sales decline in fiscal 2018 versus our 2.5% decline estimate and adjusted earnings per share of $3.55-$3.75 (including $300 million to $325 million in asset sale gains already included in our model) versus our $2.95 estimate, implies upside in future performance. That said, although we believe initiatives including increases in exclusive penetration, employee incentivization, hyperlocalization, and Backstage are boosting success, we also think that a stronger consumer, cold weather, and tax benefits (with the company guiding to a 23.25% rate versus our 27% long run estimate) were large contributors that are one time boosts or may not prove sustainable.
Therefore, we expect to increase our $28 fair value estimate by 5%-7% to reflect the benefits of tax reform, time value of money, and better merchandising and inventory but think that top-line growth will still average below total U.S. retail sales growth in the down 1% to up 1% range and that adjusted operating margin will decline once asset sales gains moderate (likely to the mid-single-digit range from 8.4% in fiscal 2017). With the runup in shares, we now view the name as more fairly valued.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.