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Stock Strategist

Macy's Deflates, and Now It's Even More Undervalued

It's plagued by slow traffic and markdowns, but we think the dividend's safe.

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Macy’s (M) share price dropped after the company reported second-quarter results and reduced its outlook for the rest of the year. We view the shares as attractive at current levels and believe the retailer won’t cut its current annual dividend of $1.51, which is yielding 9.3%. As we forecast Macy’s 2019 free cash flow at more than $1 billion, we think its annual dividend cost of less than $500 million is manageable.

Macy’s 0.2% growth in comparable sales on an owned basis in the second quarter came in below our forecast of 0.5%. Moreover, the company relied on significant discounting and promotions to sell slow-moving apparel, including private-label women’s activewear. This pressured the gross margin, which at 38.8% missed our forecast of 39.8% and represented a year-over-year decline of 160 basis points. We think the gross margin was negatively affected by both markdowns and e-commerce fulfillment costs. While Macy’s believes its inventory is in better shape headed into the fall season, it reduced its 2019 midpoint earnings per share outlook by more than 6%, suggesting a lack of momentum and lowered expectations for second-half operating income.

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David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.