Macy’s Earnings: Another Strategic Plan Is Unveiled, but Sales Growth Elusive

Key Morningstar Metrics for Macy’s

• Fair Value Estimate: $25.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Macy’s Earnings

Macy’s M 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,” which includes the planned closure of roughly 150 underperforming stores over the next three years. The company is facing a proxy battle that could result in it going private. Despite these changes, 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 more than 40 million annual customers, 30 million loyalty members, and more than $7 billion in annual digital sales. In the quarter, the firm reported comparable sales on an owned-plus-licensed basis down 4.2%, just off our 4.0% forecast, as Bloomingdale’s (down 1.6%) and Bluemercury (up 2.3%) outperformed the Macy’s nameplate (down 4.7%). Under its new plan, Macy’s hopes to go more upscale by opening Bluemercury and small-format Bloomingdale’s stores while closing its large department stores, many of which are in declining malls. While this plan makes sense, given the changes in how people shop, past efforts to adjust its store base have not had much positive effect, and there is a risk of losing customers.

Macy’s 37.5% fourth-quarter gross margin beat our estimate by 90 basis points with well-managed logistical costs and markdowns. Moreover, its 28.7% selling, general, and administrative margin eclipsed our estimate by 50 basis points as it controlled costs. Macy’s new plan includes further expense reduction, including $235 million in annual savings related to supply chain efficiency efforts. Even with such cuts, we do not think the firm can raise its long-term operating margins much above 6%, due to the marketing and other spending needed to support the business amid intense competition.