Macy’s Earnings: Plan Taking Shape Despite Tough Environment

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

Despite a tough demand environment for apparel and accessories, Macy’s M posted slightly better-than-expected results for Tony Spring’s first quarter as CEO. Although (owned) same-store sales dipped 1.2% in the quarter, this was better than our estimate for a 3% decline.

As Spring announced in February, Macy’s is closing 150 stores and implementing changes in service and merchandising in its most productive stores to move upscale. The “First 50″ stores achieved 3.3% comparable sales growth, providing some confidence in this plan, although we think it’s too early to draw conclusions about its ultimate success. No update was provided on the possible sale of Macy’s to the investment group led by Arkhouse Management. The group, which has offered $24 per share, is believed to be conducting due diligence.

We do not expect to make any material change to our fair value estimate of $25 per share, and we continue to rate the shares as undervalued. We think Arkhouse’s offer should be seriously considered, as it is close to our valuation, but there is value in Macy’s shares even if the firm remains public. Although the department store model no longer works as it once did due to intense competition, we believe the firm will generate consistent cash flow that it can use for dividend increases (yield of 3%-4%), debt reduction, and share buybacks.

In the first quarter, as in previous periods, Bloomingdale’s and Bluemercury achieved better sales results than the Macy’s nameplate. We think the typical Macy’s middle-income consumer has cut back on spending in the store’s main categories due to a decline in excess savings, inflation, and shifts in consumption. Indicative of economic stress, Macy’s net credit card revenue dropped 28% in the quarter, although this was a bit better than forecast.