Macy’s Earnings: Sales Outlook Is Disappointing but There Are Positive Signs; Shares Undervalued

Macy’s shares fell by a low-double-digit percentage after it reported disappointing second-quarter sales and offered a dim view of demand for the rest of the year. However, profitability was better than expected, and the firm did not change its 2024 EPS outlook of $2.55-$2.90. Moreover, as CEO Tony Spring’s three-year “Bold New Chapter” plan to boost sales in Macy’s most-productive stores, operate more efficiently, and expand luxury, is on track, our medium-term projections should be largely unaffected. Thus, we do not expect to make any material change to our $25 fair value estimate, leaving shares as attractive. While we rate Macy’s as a no-moat company due to the competitive challenges facing US department stores, we anticipate steady free cash flow and believe that its problems are already reflected in its valuation.