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Stock Analyst Update

Can Macy's Sustain Sales Growth?

A stronger consumer, cold weather, and tax benefits were large contributors to the retailer's fourth-quarter results.

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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.

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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.