Macy's Sales Better Than Feared

As discussed in our notes on Jan. 8 (update on holiday sales) and Feb. 5 (investor event), no-moat Macy’s M fourth-quarter results were better than we anticipated. Its same-store (owned plus licensed) sales decline of 0.5% in the quarter bettered our (December) forecast of a 2.1% drop, and its total quarterly revenue of $8.58 billion exceeded our forecast of $8.45 billion. We think Macy’s executed reasonably well in a difficult holiday period for apparel retailers. It benefited from strong e-commerce, good performance from its upgraded stores, and credit card revenue that came in 9% higher than we expected. While Macy’s gross margin on net sales of 36.8% in the quarter represented a 70-basis-point decline from last year and came in just below our expectation of 37.0%, this was likely due to higher e-commerce fulfillment costs. Macy’s recorded e-commerce revenue above $6 billion in 2019 and, according to eMarketer, is now the 10th-largest retail e-commerce firm in the United States.

Macy’s reported operating expenses as a percentage of sales of 29.3% in the quarter (above our forecast of 29.7%) and $95 million in real estate gains ($12 million more than we forecast). The firm, though, recorded $337 million in charges related to store closings, corporate downsizing, and other restructuring under its new Polaris plan. Overall, Macy’s adjusted EPS (excluding real estate and charges) of $1.89 in the quarter beat our forecast by $0.19.

Macy’s reiterated its guidance for a 2020 same-store sales decline of 1.5%-2.5% and adjusted EPS of $2.45-$2.65, roughly in line with our prior forecast of adjusted EPS of $2.45 on a same-store sales decline of 1.5%. We will likely, however, revise our long-term sales and earnings estimates because of planned closures of about 120 Macy’s stores over the next three years. We expect to reduce our $27 fair value estimate by a mid-single-digit percentage but still view shares as undervalued after the mid-single-digit drop on earnings.

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