Company Reports

We believe no-moat Macy’s is struggling to stay relevant as consumers have many choices. The firm recently announced the closure of about 150 of its lower-performing stores over the next three years as part of its “A Bold New Chapter” plan. We think this move is long overdue as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for at least 15 years. Other parts of the new strategy include investments in continuing stores, new smaller-format stores, cost reductions, supply chain investments, and luxury expansion. Even so, due to store closures and a lack of consistent organic growth, we forecast yearly revenue and operating margins will stay well below historical highs for the foreseeable future. Specifically, we estimate long-term operating margins at just over 5% on annual revenue growth below 1%.

On March 3, Arkhouse Management and Brigade Capital issued a press release to announce that they have raised their per share bid for Macy’s to $24 from $21. In addition, they revealed that Fortress Investment Group and One Investment Management have joined the bid as equity capital partners. After this release, Macy’s issued a press release of its own that confirmed its receipt of the revised offer and stated that its board would “review and evaluate” it. Conspicuously, it did not commit to engaging with the investors or granting due diligence information, as has been requested. Over the past several weeks, Macy’s board has argued that the original offer was too low and that the financing was uncertain. Now that the investment group has raised its bid by 14% and announced additional equity partners, these concerns seem unjustified.

No-moat Macy’s issued mixed fourth-quarter results as margin outperformance made up for subpar sales. This report was overshadowed by new CEO Tony Spring’s announcement of a strategic plan, "A Bold New Chapter," that includes the planned closure of roughly 150 underperforming stores over the next three years. As discussed in our recent notes, Macy’s is facing a proxy battle that could result in the company going private. Despite all this change, we do not expect to make any material revision to our $25 fair value estimate, leaving shares slightly undervalued. Although Macy’s continues to struggle to move away from the broken department store model, we think it has strengths, including having more than 40 million annual customers, 30 million loyalty members, and more than $7 billion in annual digital sales.

Arkhouse Management and Macy’s have issued separate press releases to disclose that Arkhouse has nominated nine candidates to Macy’s board (annual meeting date undetermined). Arkhouse stated that it was nominating the dissident slate to “preserve our ability to protect the rights of all shareholders.” As discussed in our prior notes on Dec. 11 and Jan. 22, it and partner Brigade Capital offered to acquire Macy’s for $21 per share in December, but this offer was rejected by Macy’s on the grounds that it was too low and that requested information on financing had not been provided. Arkhouse countered that it provided the requested information and that it may be willing to increase its bid after due diligence. It also suggested that it may take its fight directly to shareholders, as it has now done. Arkhouse’s latest release does not explicitly state it, but the result of a successful proxy fight would likely be that it and Brigade would take Macy’s private. The buyout group is probably interested in monetizing Macy’s significant real estate holdings, possibly through one or more sale-leaseback transactions.

On Jan. 21, Macy’s and Arkhouse Management put out separate press releases regarding the previously reported offer by Arkhouse and Brigade Capital Management to buy Macy’s for $21 per share in cash (see our Dec. 10 note). In its release, Macy’s called the bid “not actionable” and said that it will not sign a nondisclosure agreement or provide access to due diligence information because the investors’ offer is not compelling and their ability to raise financing is in doubt. However, in its release, Arkhouse claimed confidence in the financing and said that there is “the potential for a meaningful increase to our original proposal” if due diligence is granted. Further, the investors announced that they are prepared to pursue “direct engagement with stockholders.” While this could be interpreted as a threat to go hostile and challenge Macy’s board in a proxy fight, such a move would be costly and difficult, especially as the deadline for nominees for this year’s annual meeting is just a few weeks away.

We believe no-moat Macy’s is struggling to stay relevant as consumers have many choices. While revenue has recovered from the pandemic-related 29% drop in 2020, we think the company's fleet of more than 500 full-line stores limits its options. Macy’s operates stores in most top-tier U.S. malls, but it also operates scores of stores in weaker malls, some of which are probably not viable in the long run. The company does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think COVID-19 caused this trend to accelerate. Further, although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just above 6% over the next decade. Due to store closures and a lack of consistent organic growth, we forecast revenue will stay below historical highs for the foreseeable future.

On Dec. 10, The Wall Street Journal reported that Macy’s had received a buyout offer of $21 per share (equity value of just under $6 billion) from Arkhouse Management and Brigade Capital Management. While this offer is below our unchanged $25 per share fair value estimate, it is a premium to recent midteens share prices. Moreover, the report states that Brigade, a hedge fund with a history of investments in retail, and Arkhouse, a real estate investor, may be willing to raise their bid after due diligence. Given this possibility and Macy’s significant liabilities (including $3 billion in long-term debt), combined with our view that the firm does not have a competitive advantage, should be enough to allow this acquisition process to move forward. Our opinion is supported by the poor performance of the shares of fellow no-moat department store Kohl’s since its acquisition process collapsed in early 2022.

Macy’s (owned and licensed) same-store sales fell 6.3% in the third quarter, but this result was better than our negative 8.5% forecast. Moreover, although consumer spending is challenged and the retailer does not have strong sales momentum heading into the critical holiday period, its guidance for $1.85-$2.10 in fourth-quarter adjusted EPS aligns with our current $1.97 forecast. We do not expect to make any material change to our $25 fair value estimate, leaving shares, which rallied by a mid-single-digit percentage on the report, as undervalued. We rate Macy’s as a no-moat firm given the challenged position of traditional U.S. department stores, but we think it has strengths, including its more than 40 million active customers, sizable real estate holdings, and a very large e-commerce operation.

We believe no-moat Macy’s is struggling to stay relevant as consumers have many choices. While revenue has recovered from the virus-related 29% drop in 2020, we think the company's fleet of more than 500 full-line stores limits its options. Macy’s operates stores in most top-tier U.S. malls, but it also operates scores of stores in weaker malls, some of which are probably not viable in the long run. The company does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think the virus caused this trend to accelerate. Further, although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just above 6% over the next decade. Due to store closures and a lack of consistent organic growth, we forecast revenue will stay below prepandemic levels.

No-moat Macy’s second-quarter sales and earnings came in slightly above expectations, and the company affirmed its full-year guidance of comparable sales (owned and licensed) down 6%-7.5% and $2.70-$3.20 in adjusted EPS. However, the shares fell by a low-double-digit percentage after the report on concerns about slowing consumer spending and higher delinquencies in the credit card portfolio. Macy’s did lower its full-year guidance for credit card revenue by about 10% due to rising bad-debt expense, a sign that its largely middle-income customer base is feeling the effects of inflation. However, we anticipate only a low-single-digit cut to our $25.50 fair value estimate. We had already anticipated sizable sales declines in 2023’s second half, and we believe Macy’s strategic initiatives—including its media network, new private-label offerings, inventory control, Backstage, and cost cuts—are progressing despite the economic challenges. We view the shares, trading at a mid-single-digit P/E and offering a 5% dividend yield, as very undervalued.

We believe no-moat Macy’s is struggling to stay relevant as consumers have many choices. While revenue has recovered from the virus-related 29% drop in 2020, we think the company's fleet of more than 500 full-line stores limits its options. Macy’s operates stores in most top-tier U.S. malls, but it also operates scores of stores in weaker malls, some of which are probably not viable in the long run. The company does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think the virus caused this trend to accelerate. Further, although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just above 6% over the next decade. Due to store closures and a lack of consistent organic growth, we forecast no revenue growth over this period.

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.

We believe no-moat Macy’s is struggling to stay relevant, as consumers have many choices. While its revenue has recovered from the virus-related 29% drop in 2020, we think its large fleet of more than 500 full-line stores limits its options. Macy’s operates stores in most top-tier U.S. malls, but it also operates scores of stores in weaker malls, some of which are probably not viable in the long run. The company does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think the virus may cause this trend to accelerate. As evidence of its struggles, wide-moat Nike reportedly dropped Macy’s as a wholesale customer. Further, although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just 6.5% over the next decade. Further, due to store closures and a lack of consistent organic growth, we forecast the firm’s revenue will rise at a compound rate of less than 1% over this period.

Macy’s announced that Jeff Gennette will retire as CEO next February and be replaced by Tony Spring, the current CEO of Bloomingdale’s. Also, Chief Financial Officer Adrian Mitchell has added the chief operating officer title and taken on an expanded role in store, technology, and supply chain management. Spring’s elevation was likely boosted by Bloomingdale’s recent solid performance, while Mitchell has been involved with Macy’s Polaris plan since its early days. We do not expect the transition to bring about any significant shift in Polaris or Macy’s capital allocation plans, which include significant share repurchases ($600 million in 2022) and consistently rising dividends (current yield of 4%). Thus, we are maintaining our Standard capital allocation rating.

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).

Macy’s announced that its fourth-quarter net sales are expected to be at the low end to midpoint of its previously issued range of $8.161 billion-$8.401 billion, roughly in line with our $8.257 billion forecast. Further, the firm reiterated its EPS guidance range for the quarter of $1.47-$1.67 (we are at $1.56), implicitly holding its expected gross margin on net sales at around our forecast of 34%. Macy's indicated that sales were strong around Thanksgiving and just before Christmas but were slower in other parts of November and December, suggesting healthy gift buying but cutbacks on self-purchases. Moreover, based on macroeconomic data and its own credit card usage information, the firm projected subpar consumer spending in 2023, especially in the first half of the year. On the brighter side, Macy's disclosed that it expects its year-end 2022 inventory to be marginally lower than at year-end 2021 and down about 15% from 2019's level, better than we had expected and putting the firm in its best post-holiday inventory position in many years. The firm is expected to report its full results in late February.

We believe no-moat Macy’s is struggling to stay relevant, as consumers have many choices. While its revenue has recovered from the virus-related 29% drop in 2020, we think its large fleet of more than 500 full-line stores limits its options. While Macy’s operates stores in most top-tier U.S. malls, it also operates scores of stores in weaker malls, some of which are probably not viable in the long run. Macy’s does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think the virus may cause this trend to accelerate. As evidence of its struggles, wide-moat Nike has reportedly dropped Macy’s as a wholesale customer. Although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just 6% over the next decade. Further, due to store closures and a lack of consistent organic growth, we forecast the firm’s revenue will rise at a compound rate of less than 1% over this period.

Macy’s exceeded our third-quarter expectations as its Polaris plan progresses. However, the firm experienced a slowdown in sales at the end of October and the beginning of November, partly due to unseasonably warm weather, and its fourth-quarter guidance is below our forecast. Macy's expects $1.47-$1.67 in adjusted EPS on $8.16 billion-$8.4 billion in sales, suggesting a comparable sales decline of about 4%, versus our $1.81 EPS and $8.32 billion sales estimates. On a brighter note, outperforming many peers, quarter-end inventory was up only 4%. Still, significant markdowns are likely in apparel retail this holiday season as inflation slows consumer spending and industry inventories are elevated.

We believe no-moat Macy’s is struggling to stay relevant, as consumers have many choices. While its revenue jumped 40% in 2021 after a coronavirus-related 29% drop in 2020, we think its large fleet of more than 500 full-line stores limits its options. While Macy’s operates stores in most top-tier U.S. malls, it also operates scores of stores in weaker malls, some of which may not fully recover from shutdowns and the economic fallout of the pandemic and war in Ukraine. Macy’s does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think the virus may cause this trend to accelerate. As evidence of its struggles, wide-moat Nike has reportedly dropped Macy’s as a wholesale customer. Although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just 6% over the next decade. Further, due to store closures and a lack of consistent organic growth, we forecast the firm’s revenue will rise at a compound rate of less than 1% over this period.

We believe no-moat Macy’s is struggling to stay relevant, as consumers have many choices. While its revenue jumped 40% in 2021 after a coronavirus-related 29% drop in 2020, we think its large fleet of more than 500 full-line stores limits its options. While Macy’s operates stores in most top-tier U.S. malls, it also operates scores of stores in weaker malls, some of which may not fully recover from shutdowns and the economic fallout of the pandemic and war in Ukraine. Macy’s does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think the virus may cause this trend to accelerate. As evidence of its struggles, wide-moat Nike has reportedly dropped Macy’s as a wholesale customer. Although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just 6% over the next decade. Further, due to store closures and a lack of consistent organic growth, we forecast the firm’s revenue will rise at a compound rate of less than 1% over this period.