Macy’s Earnings: Sales Outlook Is Disappointing, but There Are Positive Signs

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

Macy’s M shares fell by a low-double-digit percentage after the firm 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 the 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 fair value estimate of $25 per share, leaving them attractive.

Macy’s recorded a 4% drop in (owned) comparable sales in the second quarter, short of our negative 0.4% estimate. Sales weakened as the period progressed, and management indicated this negative trend has continued. Providing some hope, the firm reported slightly positive same-store sales at Bluemercury and in the 50 leading stores at which it has implemented its new store plans, which will be brought to an additional 100 stores over time. However, we are realistic about Macy’s challenges, forecasting same-store sales growth of just 0.5% in the long run.

Despite the sales shortfall, Macy’s 4.4% quarterly operating margin outpaced our 2.8% estimate. Its 40.5% gross margin was 70 basis points above our forecast on reduced discounting, and its real estate gains were above expectations. Moreover, to its credit, its selling, general, and administrative expenses were 40% of net sales (matching our estimate) as it cut costs when it recognized poor sales trends. We forecast operating margin improvement to 5.4% over the next three years on the benefits of its strategy and the closure of 150 underperforming stores.