No-moat Macy's (M) chalked up first-quarter revenue growth of 3.6%, above our full-year forecast of a 2% decline. However, this gain came on top of a weak year-ago period, when sales tumbled 7.5%. Further tempering our enthusiasm surrounding the sustainability of this performance, the firm’s 4.2% comparable-sales growth (on an owned plus licensed basis) included a 250-basis-point boost from shifting its Friends and Family sale to the first quarter from the second, representing a 1.7% lift versus our flat comparable estimate. Although these sales prompted 40 basis points of adjusted operating margin expansion to 4.6%, we continue to believe that the intense competitive landscape will ultimately force Macy’s to continue investing in growth avenues, which ultimately stands to eat into profits.
As a result of Macy's solid start to the year, management raised its full-year earnings per share guidance by $0.20 at the midpoint, to $3.75-$3.95 versus our prior $3.62. We are likely to edge up our $29 fair value estimate to reflect a slightly more favorable near-term outlook. However, we don’t intend to alter our long-term outlook for a 1% sales decline on average over the next five years and operating margins falling to 5% by fiscal 2021, against the 8% three-year historical average, as we expect rent and salary savings from store closures will be offset by ongoing pricing pressure and mix shifts to e-commerce. With the double-digit uptick in the share price after the earnings release, we now view the stock as modestly overvalued and suggest awaiting a more attractive risk/reward opportunity before building a position in the name.
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John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.