Solid Quarter for Macy's but Headwinds Remain

No-moat

We are encouraged by Macy’s optimizing its store base while growing its digital presence through the buy-online-ship-to-store initiatives and the Growth50 remodels. On the loyalty side, Macy’s program that leverages access to events in their entertainment and events business (Macy's Thanksgiving Day Parade, concerts, fashion shows, cooking classes) for the most loyal customers is a driver for the 2 million new members that have joined since the beginning of the year. These customers on average visit stores more often and spend more, according to management. We surmise that these factors led to more full-priced selling, which aided in the 2.6% increase in average unit retail, validating our expectation for 20 basis points in gross margin expansion for the year to 41%. However, we contend that the firm is at the mercy of secular issues, and while loyalty program adoption has been strong, other retailers can replicate the offerings, thus not providing a long-term competitive advantage.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.