COVID-19 Damage to Macy's Should Subside in 2021
We have reduced our fair value estimate and we view shares as undervalued.
We think no-moat Macy’s (M) is facing massive declines in sales and earnings in 2020 due to COVID-19 but will remain solvent and return to profitability in 2021. As all its stores are currently closed and the U.S. economy is likely to slow, we now expect Macy’s sales will drop 21% in 2020 and that it will report an operating margin of negative 4%. Thus, we have reduced our fair value estimate to $17.60 from $25.50. However, we view shares, trading at less than 50% of our fair value estimate, as undervalued.
Macy’s has significant debt, with total short- and long-term debt of $4.2 billion at the end 2019 (offset by $685 million in cash). As we forecast Macy’s will report negative EBITDA in 2020, we expect it will trip its debt covenants, which are maximum interest coverage and leverage ratios of 3.25 and 3.75 times, respectively. However, given the extraordinary nature of the COVID-19 crisis, we do not expect lenders to take adverse action against the company. Macy’s has already taken steps to shore up its liquidity by drawing down $1.5 billion on its revolving credit facility and suspending its dividend.
Macy’s, as a seller of clothing and other discretionary goods, is vulnerable to a downturn in the U.S. economy. Indeed, in 2008 and 2009, it reported same-store sales declines of 4.6% and 5.3%, respectively. Our forecast of a 21% decline in Macy’s 2020 sales is based on comparable (owned) sales declines of 37%, 29%, 15%, and 9% in the first, second, third, and fourth quarters, respectively. Although we forecast expense cuts, we do not think Macy’s can fully offset such large declines and forecast EPS of negative $2.53 in 2020. We do, however, expect a bounceback in 2021, as we forecast total revenue of $25.3 billion (in line with the 2019 result) and EPS of $2.18.
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David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.