No-Moat Macy’s Navigating Tough Environment Reasonably Well; Shares Attractive

Macy’s closed 2022 with fourth-quarter results that were in line with our expectations, a positive result given excess inventories across the apparel retail industry and softening consumer spending amid high inflation. No-moat Kohl’s, in contrast, posted an unexpected loss for the period due to large discounting. While Macy’s guidance for 2023 of a comparable sales decline of 2%-4% and EPS of $3.67-$4.11 is shy of our respective flat and $4.27 expectations, the shortfall is marginal given the state of the market. Indeed, Macy’s shares rallied by about 10% on the report, leaving them roughly 15% below our $27 fair value estimate, which we do not expect to change. Although we rate Macy’s as a no-moat firm in the challenged department store space, we also believe it has strengths, including its loyalty program of 30 million members, its partnerships with popular brands, and large e-commerce of about $8 billion per year (about one third of sales).