Macy’s Earnings: Outlook Holds Despite Economy and Credit Concerns

Macy’s Stock at a Glance

• Fair Value Estimate: $25.50
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Macy’s Earnings Update

Macy’s M 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%, along with adjusted earnings per share of $2.70-$3.20. However, 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 the second half of 2023, 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 company’s shares as very undervalued.

Macy’s reported a 7.3% decline in comparable sales (owned and licensed) in the second quarter, marginally better than our 8% forecast, as it cleared excess inventory a bit quicker than expected. Although discounting to move this merchandise and ongoing issues with theft resulted in a 130-basis-point decline in merchandise margin, its 38.1% gross margin on net sales met our estimate. We forecast Macy’s will hold its gross margin on sales above 38% in the long run.

Although Macy’s operating margin was a very low 2.3%, this outperformed our forecast by 80 basis points due to lower expenses. Selling, general, and administrative expenses fell $31 million from the prior year—evidence that cost initiatives are succeeding. Macy’s operating margin is likely to be around 5% this year, but we anticipate an improvement to 6.5% by 2025.