No-Moat Macy’s Closes 2021 on a Strong Note

No-moat Macy’s M finished up a stellar 2021 with fourth-quarter results that exceeded our estimates. Moreover, its initial guidance for 2022 is positive despite very tough comparisons and concerns about inflation. Given this outlook and a reversal of our prior expectation of a higher U.S. corporate tax rate, we expect to increase our fair value estimate of $22.50 by nearly 10%. Even so, and despite a P/E in the midsingle digits, we view Macy’s as fully valued. While we acknowledge the firm is coming off a great year (10% operating margin), we view recent results as anomalous as low unemployment, government stimulus, and other factors have created an unusually favorable environment of high demand and low markdown rates for many apparel retailers. Macy’s peer Dillard’s, for example, achieved two-year comparable sales growth of 8% in 2021, even better than Macy’s 3% result. In the long run, we still think Macy’s, as a mall-based department store operator, lacks a competitive edge and anticipate its operating margins will drop to the mid-single-digit levels of the prepandemic years.

Macy’s achieved 27.8% same-store sales growth on an owned plus licensed basis in the quarter, just above our 26% forecast. Further, its 36.5% gross margin eclipsed our 35.7% estimate as the sales outperformance and strong full-price sell-through (merchandise margins up 160 basis points over 2019) overcame the impact of holiday shipping surcharges. Macy’s also saw the benefit of cost reductions under its Polaris plan, as its selling, general, and administrative costs came in at 28% of sales, down from 30% two years ago. Boosted by the high sales and gross margin, Macy’s 11.7% operating margin handily beat our 9.1% estimate.

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