Macy’s Earnings: Progress on Key Initiatives Going Into Holiday Season

Key Morningstar Metrics for Macy’s

• Fair Value Estimate: $25.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Macy’s Earnings

Macy’s M (owned and licensed) same-store sales fell 6.3% in the third quarter, but this result was better than our forecast of -8.5%. Moreover, though consumer spending is challenged and the retailer does not have strong sales momentum heading into the critical holiday period, its guidance for adjusted earnings per share of $1.85-$2.10 in the fourth quarter aligns with our current forecast of $1.97.

We do not expect to make any material change to our $25 fair value estimate, leaving the stock (which rallied by a mid-single-digit percentage on the report) undervalued. We rate Macy’s as a no-moat firm, given the challenged position of traditional U.S. department stores. Still, we think it has strengths, including its more than 40 million active customers, sizable real estate holdings, and very large e-commerce operation.

In the third quarter, Macy’s demonstrated progress on its value creation drivers, which include expense discipline, gross margin improvement, and better inventory productivity. On the latter, its inventory was down 6% from last year and 17% compared with (pre-pandemic) 2019, despite the declining sales. We think the improving inventory control will allow for less discounting in this year’s holiday season, even as overall sales are likely to decline.

Lower markdowns did aid the company’s third-quarter gross margin on net sales, which at 40.3% was 30 basis points above our estimate and 160 basis points better than last year. On costs, the firm’s 40.5% selling, general, and administrative expense margin was 40 basis points lower than our forecast. Macy’s operating margin should be around 5% this year. We think this will improve to about 6.5% in three years, due to the firm’s efficiency and pricing efforts, as well as its growth initiatives, such as greater private-label and luxury sales, small-format stores, and its online marketplace.