Macy's Achieves Unexpected Profit

Fueled by government stimulus, widespread vaccinations, and pent-up demand, shoppers returned to no-moat Macy's M in the first quarter, leading to a large sales outperformance and an unexpected profit. While some of these factors may be transitory, the firm's full-year guidance suggests sales trends look brighter than we had anticipated. Thus, we expect to raise our $17.40 fair value estimate by a mid-single-digit percentage, leaving the shares fully valued. Against an easy comparison due to shutdowns last year, Macy's reported a 62.5% comparable sales increase on an owned basis in the quarter, well above our 41% forecast, as shopping habits began to look more normal. Same-store sales on an owned basis were still down 10.5% from 2019's first quarter, but this was an improvement over the previous quarter's negative 17.0% result. Macy's e-commerce continued to partially offset soft store traffic as it accounted for 37% of 2021 first-quarter sales, up from 24% two years ago. Under its Polaris plan to improve its e-commerce and expand its third-party marketplace, Macy's has a goal of $10 billion in digital sales in 2023, up from about $7.7 billion in 2020, which we think is achievable. Aided by the sales outperformance, limited discounting, and low inventories, Macy's reported a gross margin on net sales of 38.6% in the quarter, in line with a typical (prepandemic) first-quarter result and 280 basis points above our forecast. Selling, general, and administrative expenses of $1.75 billion were only slightly below our estimate but down $364 million compared with the first quarter of 2019 thanks to Polaris efficiency initiatives and downsizing. As a result, the firm recorded a 4.6% operating margin in this year's first quarter, compared with 2.8% two years ago. However, Macy's acknowledges it is understaffed and will need to ramp up some expenses as store traffic improves.

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