Macy’s Earnings: Signs of Progress Despite Disappointing Near-Term Outlook

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

After postponing due to the discovery of underreported expenses, Macy’s M released full third-quarter sales and earnings that aligned with our expectations and its preliminary release. Providing confidence in its “Bold New Chapter” plan, the company reported positive comparable sales growth in its “First 50″ stores and at its Bloomingdale’s and Bluemercury subsidiaries.

Although Macy’s shares fell by a mid-single-digit percentage on Dec. 11 as its fourth-quarter profit guidance was disappointing due to a promotional holiday environment and weather issues, the effect on our valuation from this shortfall is immaterial. We thus do not expect to make any material change to our fair value estimate of $25 per share, leaving the stock attractive.

Macy’s 2.4% comparable sales decline in the third quarter was just short of our estimate for a 2.0% fall. As the “First 50″ stores initiative continued to outperform (1.9% same-store sales increase), overall sales results could improve as the investments are expanded to more stores next year. Further, Macy’s 39.6% quarterly gross margin missed our 40.4% estimate, due in part to the delivery expense issue. Although its 0.9% adjusted operating margin was 30 basis points above our estimate, it was boosted by greater real estate sales than anticipated. Macy’s now expects to close 65 stores by the end of January 2025, up from its prior expectation of 55. It makes sense for the firm to close its underperforming stores as soon as possible.

Quarterly EPS of $0.04 was above our flat estimate. For the full year, adjusting for the delivery cost change, Macy’s lowered its EPS guidance to $2.25-$2.50 from $2.34-$2.69, even though its guidance suggests it will return to positive same-store sales in the fourth quarter. Thus, we expect to reduce our fourth-quarter operating margin estimate of 9.3%. In the long run, we estimate its annual operating margins at 5.4%.