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Stock Analyst Update

Undervalued Macy's Announces Strategic Plan

We expect to reduce our long-term sales and earnings estimates to account for the store closures and the new Polaris plan.

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On Feb. 5, no-moat Macy’s (M) held an investor event to provide updated short- and long-term guidance and announce a new strategic plan called Polaris. This plan includes five major initiatives: organizational changes, store closures, e-commerce enhancements, an expanded loyalty program, and a renewed focus on its private-label brands. Polaris includes some cutbacks that we view as potentially hurting sales and its brand but likely necessary. We also like the focus on cost savings. Polaris is designed to create $1.5 billion in savings by the end of 2022 through $600 million of gross margin improvement and a $900 million reduction in operating costs. We had previously anticipated that Macy’s could cut costs and improve pricing and had modeled some improvement in its gross margin (reaching 40.7% in 2023 from our 40.1% estimate in 2019). However, we do not expect its long-term operating margins to rise much above 6% (near its average of the last three reported years).

Macy’s pre-announced adjusted 2019 diluted EPS in the range of $2.72 to $2.77, above our $2.66 forecast. The firm’s holiday sales were not as bad as we had feared (as discussed in our Jan. 8 note). For 2020, Macy’s now expects net sales of about $23.75 billion (midpoint) and adjusted EPS of $2.45-$2.65 on a same-store sales decline of 1.5%-2.5%. We had (prior to the announcement of store closures) expected a 2020 same-store sales decline of 1.5% and sales and EPS of $24.3 billion and $2.45, respectively. For 2022 (after Polaris), Macy’s targets net sales of about $23.55 billion (midpoint), adjusted EPS of $2.50-$3.00, and $1 billion in free cash flow. We had previously forecast EPS of $3.26 and free cash flow of $1.1 billion on $23.8 billion in sales. Thus, we expect to reduce our long-term sales and earnings estimates to account for the store closures and Polaris after Macy’s reports its full-year earnings on Feb. 25. Macy’s continues to trade below our fair value estimate of $27 per share.

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