Skip to Content
Stock Analyst Update

Solid Quarter for Macy's but Headwinds Remain

We're not changing our fair value estimate as the firm faces a highly competitive retail industry.

Mentioned:

No-moat  Macy's (M) continued to execute on its North Star strategy review after posting solid third-quarter fiscal 2018 results. Macy’s results were driven by continued strength in its digital business (double-digit growth, and mobile app sales should hit $1 billion in 2018) and comparable-store sales (up 3.3%). As a result, management again raised full-year fiscal 2018 guidance, now expecting comparable sales of 2.3%-2.5% (up from 2.1%-2.5% and our 2% estimate prior) and EPS $0.15 higher at the midpoint ($4.10-$4.30), outpacing our $4.09 estimate. However, we don’t plan a material change to our $29 fair value estimate, as we continue to believe the firm faces a highly competitive retail industry, including quick-turning fashion trends, nonexclusive products, and an overpenetrated retail environment. We don’t intend to alter our long-term outlook for a 1% sales decline (driven by weak comparable sales) on average over the next five years and operating margins falling to 5% by fiscal 2021.

We are encouraged by Macy’s optimizing its store base while growing its digital presence through the buy-online-ship-to-store initiatives and the Growth50 remodels. On the loyalty side, Macy’s program that leverages access to events in their entertainment and events business (Macy's Thanksgiving Day Parade, concerts, fashion shows, cooking classes) for the most loyal customers is a driver for the 2 million new members that have joined since the beginning of the year. These customers on average visit stores more often and spend more, according to management. We surmise that these factors led to more full-priced selling, which aided in the 2.6% increase in average unit retail, validating our expectation for 20 basis points in gross margin expansion for the year to 41%. However, we contend that the firm is at the mercy of secular issues, and while loyalty program adoption has been strong, other retailers can replicate the offerings, thus not providing a long-term competitive advantage.

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.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.