Soft Q3 Sales Slow Holiday Momentum for Macy's

No-moat Macy’s M missed our expectations in the third quarter of 2019 and provided disappointing sales guidance. The firm reported a same-store sales (owned plus licensed) decline of 3.5% in the third quarter, below our forecast of a 0.1% decline. Macy’s blamed the slow sales on a soft market for women’s and cold weather apparel, continuing weakness in international tourism (down 6.3% after a 4% drop last year), and poor results at stores in lower-tier malls. We think the apparel retail market continues to be promotional as many retailers have excess inventory. Macy’s, though, exited the quarter with inventories up just 1.5% from last year and did not match some competitors’ markdowns. While this strategy likely hurt sales in the quarter, it also resulted in a gross margin on net sales that, at 40.0%, was 30 basis points better than our forecast and better than the sub-39% levels of the previous three quarters. As Macy’s expects the slow sales trends to persist into the holiday period (for example, international tourism may fall 6%-9%), it guided to a full-year same-store sales (owned plus licensed) decline of 1%-1.5% versus our prior forecast of a 0.7% increase. We estimate Macy’s guidance implies a same-stores sales drop of about 2% (versus our prior forecast of a 1.6% increase) in the fourth quarter (which accounts for most of its annual profit). The firm cut its 2019 EPS range to $2.57-$2.77 from a previous range of $2.85-$3.05. We had been at the low end of Macy’s prior 2019 EPS guidance but, given the sales trends in the third quarter and guidance, we expect to cut our fourth-quarter EPS forecast by about 10%. However, we do not expect to change our long-term view on Macy’s (including annual sales declines of about 1%) and believe it has strengths, including its e-commerce, its growing Bluemercury chain, and its large real estate holdings. We expect no significant change to our fair value estimate on Macy’s of $27 per share and view shares as undervalued.

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