Macy’s Strong Third-Quarter Results Tempered by Soft Holiday Start

Macy’s Stock at a Glance

• Current Morningstar Fair Value Estimate: $25.50
• Macy’s Stock Star Rating: 3 Stars
• Economic Moat Rating: None
• Moat Trend Rating: Negative

Macy’s Earnings Update

Macy’s (M) exceeded our third-quarter expectations as its Polaris plan progresses. However, the firm experienced a slowdown in sales at the end of October and the beginning of November, partly due to unseasonably warm weather, and its fourth-quarter guidance is below our forecast. Macy’s expects $1.47-$1.67 in adjusted EPS on $8.16 billion-$8.4 billion in sales, suggesting a comparable sales decline of about 4%, versus our $1.81 EPS and $8.32 billion sales estimates. On a brighter note, outperforming many peers, quarter-end inventory was up only 4%. Still, significant markdowns are likely in apparel retail this holiday season as inflation slows consumer spending and industry inventories are elevated.

Macy’s recorded a 3.1% comparable sales drop (positive 37.2% last year) in the third quarter, slightly better than our negative 3.5% forecast. Both Bloomingdale’s (up 4.1%) and Bluemercury (up 14%) had positive same-store sales, which supports our view that higher-income shopping is relatively healthy.

Macy’s 38.7% gross margin outperformed our estimate by 120 basis points as the company partially overcame markdowns through pricing and efficiency efforts. This led to a 3.7% operating margin (versus our 2% forecast) and $0.52 in adjusted EPS that beat our forecast by $0.35. As 3.7% is a solid third-quarter operating margin by historical standards, we believe it shows that cost-containment efforts are paying off. However, we rate Macy’s as a no-moat retailer, so we do not believe it will make much improvement on its prepandemic operating margins of around 6% in the long run.

Macy’s updated its 2022 adjusted EPS outlook to $4.07-$4.27, an increase of $0.07 on both the low and high ends, as the third-quarter outperformance is mostly offset by limited visibility on the holiday period. We expect to lift our $25.50 fair value estimate by a low-single-digit percentage, leaving the shares slightly undervalued after a 12% bounce on the earnings report.