Macy’s: Unfortunate Earnings Delay, but Preliminary Sales Match Expectations

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

Macy’s M postponed its third-quarter earnings report to Dec. 11 from Nov. 26 after the firm discovered that its delivery expenses over the past three years had been underreported by $132 million-$152 million. The company claims a former employee intentionally misstated these costs. Although a disappointing development, the problem appears to be contained. The cost discrepancies are immaterial, considering Macy’s annual operating expenses exceed $8 billion.

The firm also provided some preliminary third-quarter results. Although it reported some weakness in cold weather categories (a warm fall) and e-commerce, its comparable sales (company-owned plus licensed) matched our estimate by falling 1.3%. Looking deeper, Macy’s had a 2% same-store sales drop, but there were positive signs, including same-store sales increases of 1.9% at the “First 50″ Macy’s stores and above 3% at Bloomingdale’s and Bluemercury. We regard these results as supportive of the company’s “A Bold New Chapter” plan, as they suggest that improvements in the leading Macy’s stores and a focus on luxury are improving sales.

Further, Macy’s revealed that its asset sales were $66 million and other revenue was at $161 million in the quarter. As our estimates for these items were lower ($19 million and $138 million, respectively), there could be an upside to our breakeven EPS forecast.

Macy’s will provide fourth-quarter guidance when it reports its full results. There was a brief mention in the preliminary release that November comparable sales are trending ahead of those for the third quarter. This could indicate fourth-quarter outperformance is coming, but we think it is too early in the holiday shopping period to draw conclusions. For now, we are not changing our fair value estimate of $25 per share and rate the stock as very undervalued. Macy’s problems are well-known, but we think it has reasonable plans to stabilize its sales and improve margins.