Macy’s Lowers Guidance Less Than Feared

No-moat Macy’s (M) second-quarter results were above our expectations. However, the focus was on current trends, given concerns that consumer spending on apparel and home goods is declining due to inflationary pressures. While Macy’s did experience weakening sales in the latter part of the quarter and lowered its outlook for 2022, its guidance cut was less than feared, pushing its share price up by a mid-single-digit percentage on Aug. 23. The company now expects full-year comparable sales growth on owned inventory of 0%-1% (versus our 2% growth estimate) and adjusted earnings per share of $4.00-$4.20, below our $4.76 forecast and down from previous guidance of $4.53-$4.95. For comparison, no-moat Kohl’s recently slashed its full-year EPS guidance more than 50%.

Thus, we think Macy’s is outperforming some others, and we don’t expect to materially change our $25.50 fair value estimate. Although we rate the company as having no moat, we think it is undervalued and its recent improved results and debt reduction have put it on more solid footing. In fact, it has no significant debt maturities until the latter part of this decade and has reduced long-term debt (currently about $3 billion) by about 50% over the past five years.

Against a tough comparison, Macy’s net sales slid 0.8% in the quarter, better than our forecast of a 2.1% decline. Same-store sales dropped 2.8% at the Macy’s brand but increased 5.8% and 7.6% at its smaller Bloomingdale’s and Bluemercury nameplates, respectively. These results suggest that although middle-class spending has slowed, higher-income shopping has not, allowing Macy’s some benefit from diversification.

Macy’s margins were down from last year’s sky-high levels, but the 38.9% gross margin on net sales nearly matched our 39% estimate and the 7.1% operating margin beat our forecast by 60 basis points. Operating margins remain above prepandemic levels, but we expect them to moderate to 5%-6% in the long term on competitive pressures.