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Macy’s Earnings: Plan Taking Shape Despite Tough Environment

We continue to rate Macy’s stock as undervalued.

The Macy's logo and signage is displayed outside the Herald Square department store.
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Macy's Inc

Key Morningstar Metrics for Macy’s

What We Thought of Macy’s Earnings

Despite a tough demand environment for apparel and accessories, Macy’s M posted slightly better-than-expected results for Tony Spring’s first quarter as CEO. Although (owned) same-store sales dipped 1.2% in the quarter, this was better than our estimate for a 3% decline.

As Spring announced in February, Macy’s is closing 150 stores and implementing changes in service and merchandising in its most productive stores to move upscale. The “First 50″ stores achieved 3.3% comparable sales growth, providing some confidence in this plan, although we think it’s too early to draw conclusions about its ultimate success. No update was provided on the possible sale of Macy’s to the investment group led by Arkhouse Management. The group, which has offered $24 per share, is believed to be conducting due diligence.

We do not expect to make any material change to our fair value estimate of $25 per share, and we continue to rate the shares as undervalued. We think Arkhouse’s offer should be seriously considered, as it is close to our valuation, but there is value in Macy’s shares even if the firm remains public. Although the department store model no longer works as it once did due to intense competition, we believe the firm will generate consistent cash flow that it can use for dividend increases (yield of 3%-4%), debt reduction, and share buybacks.

In the first quarter, as in previous periods, Bloomingdale’s and Bluemercury achieved better sales results than the Macy’s nameplate. We think the typical Macy’s middle-income consumer has cut back on spending in the store’s main categories due to a decline in excess savings, inflation, and shifts in consumption. Indicative of economic stress, Macy’s net credit card revenue dropped 28% in the quarter, although this was a bit better than forecast.

Macy's Stock vs. Morningstar Fair Value Estimate

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

David Swartz

Senior Equity Analyst
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David Swartz is a senior equity analyst in the consumer sector research group for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers consumer-focused companies in retail and apparel.

Before joining Morningstar in 2018, Swartz worked as a money manager and equity analyst for a family office in the Seattle area. He also worked as an analyst and fund manager for three equity hedge funds in the San Francisco Bay Area.

Swartz holds a bachelor’s degree in economics from the University of California at Berkeley and a master’s degree in economics from Yale University. He also holds a certificate in finance (investment management specialization) from UC Berkeley Extension.

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