Macy’s Earnings: Lowered Outlook on Waning Spending Overshadows Positives; Shares Undervalued

Macy's missed sales expectations in its first quarter as weather and economic issues damped demand. Further, as consumer spending on apparel remains uneven and as discounting will be needed to move seasonal inventory, the firm reduced its 2023 outlook. Specifically, it now anticipates adjusted EPS of $2.70-$3.20, down from $3.67-$4.11 previously and our $3.87 estimate, with most of the shortfall coming in the second quarter. As we expect to adjust our forecast to be closer to the guidance, our $27 per share fair value estimate should fall by a mid-single-digit percentage. Even so, we view Macy's shares, trading at a mid-single-digit P/E and offering a 5% dividend yield that we view as secure, as attractive. Although we rate it as a no-moat retailer given the challenges facing department stores, we think Macy's valuation reflects a high level of pessimism as we anticipate annual free cash flow generation of nearly $1 billion after 2023.