Cost-Cutting Helped Macy's Limit Pain from Shutdowns

No-moat Macy’s M sales were greatly affected by coronavirus-related temporary store closures in the second quarter of 2020 as 53% e-commerce growth was not enough to overcome a 61% drop in store sales. The firm suffered a same-store sales decline of 34.7% on an owned basis, which exactly matched our forecast. Yet, its operating loss was not as bad as we feared as its selling, general, and administrative expenses came in about 15% below our expectation on staff furloughs and other cost cuts. Macy’s did not provide formal guidance, but its current trends are roughly in line with our prior view. Thus, we do not expect to make any material change for our per share fair value estimate of $16.30 and view it as undervalued. While Macy’s has big challenges, we believe it has enough liquidity to get through the current crisis and its large e-commerce exposure (54% of second quarter sales) is an advantage over some rivals.

Macy’s 23.6% quarterly gross margin on net sales was well below last year (38.8%) but was 180 basis points better than our forecast. The firm reported improved sell-through, which aided pricing and led to a 27% decline in inventories from the first quarter. Strength in luxury and home in the quarter partially offset weakness in apparel. Including restructuring charges of $242 million (mainly related to layoffs), Macy’s operating margin and EPS of negative 18% and negative $1.39, respectively, outperformed our forecast of negative 25% and negative $2.24.

Macy’s recovery in the second half of 2020 appears slow. The firm projected fall season same-store sales down in the low- to mid-20% range, slightly worse than our forecast of negative 20% for the third quarter. Usually a strength, Macy’s flagship stores are suffering due to low international tourism and the large number of corporate employees who are working from home. However, we now think its expense savings will be greater than originally expected after it cut 3,900 corporate jobs in late June.

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