Macy's Reports Awful Partial First-Quarter Results
Although we expect to reduce our fair value estimate, we view shares as attractive and believe the company will survive as a downsized business.
No-moat Macy’s (M) reported horrible preliminary results for the first quarter of 2020 as COVID-19 forced temporary closures of all its stores. The firm will not release full results until July 1 due to virus-related difficulties in closing the books, but it expects first-quarter net sales of about $3.0 billion (a decline of about 45%) and an operating loss of $905 million to $1.11 billion (including a $300 million inventory obsolescence charge). Macy’s also anticipates unspecified goodwill and asset impairment charges. We had expected a 37% net sales decline and a $445 million operating loss. Although we expect to reduce our per share fair value estimate of $17.60 by a high-single-digit percentage after the quarterly report, we view Macy’s as attractive, as we believe it will survive as a downsized business and return to profitability.
Macy’s has taken drastic steps to conserve cash, such as suspending its dividend (saving about $450 million in cash per year), furloughing staff, and cutting planned 2020 capital expenditures by more than $500 million. The firm entered May with $1.52 billion in cash and total debt of $5.66 billion and is trying to raise additional capital. While this process is likely complicated by the economic shock and the resignation of chief financial officer Paula Price (announced in April), we believe Macy’s will raise the necessary funds, as rivals no-moat Kohl’s and narrow-moat Nordstrom have recently completed bond offerings (albeit at high interest rates around 9%). Macy’s has extensive real estate, inventory, and other assets that it can use as collateral.
We expect that the second quarter will be the low point for Macy’s in 2020. About 180 of its stores have already reopened, and 80 more are opening this weekend. Macy’s large e-commerce (more than $6 billion last year) and new curbside pickup can offset some sales lost to closures, but its operations are still highly dependent on its physical stores and on its credit card operations.
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David Swartz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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