Recovery Looks Slow for Macy's After First Quarter Loss

No-moat Macy’s M reported a horrendous loss in the first quarter of 2020 as its stores were closed for about half the period due to the COVID-19 pandemic. Shares, though, were little changed, as its adjusted EPS loss of $2.03 on a 45% decline in sales matched its preliminary report of June 9. As discussed in our preannouncement notes, we expect to reduce our per share fair value estimate on Macy’s of $17.60 by a high-single-digit percentage but view shares as undervalued. We believe that a downsized Macy’s will survive this crisis. The firm closed the quarter with $1.5 billion in cash and secured $4.5 billion in new financing through a $1.3 billion offering of 8.375% senior secured notes (matures in 2025) and a $3.15 billion asset-backed credit facility (matures in 2024), which we believe is enough liquidity for it get through the pandemic without further financing. Moreover, Macy’s still has valuable real estate that can be borrowed against if necessary.

As Macy’s first-quarter results were largely known, the focus of the earnings report was on its restructuring and cost-cutting plans and the pace of its recovery from the store shutdowns. Since early May, Macy’s has been gradually reopening its stores, and nearly all of them are now operating. While initial customer traffic came back stronger than the company expected, unemployment remains very high, mall traffic is generally poor, international travel (4% of Macy’s sales last year) is almost non-existent, and there is considerable concern over a rising number of coronavirus cases in some parts of the United States. Thus, Macy’s expects comparable sales declines of 35% in the second quarter and more than 20% in the third and fourth quarters. While this outlook is below our prior (March) expectations of declines of 29%, 15%, and 9%, in the second, third, and fourth quarters, respectively, visibility is very low on the critical fall and holiday seasons, so Macy’s outlook could prove conservative.

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