Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 1Q18 Earnings Release
Prev. Ed.: May 10, 2018; 4Q17 Earnings Update
Flash Update [Earnings update in progress; to follow]
On May 16, 2018, Macy’s delivered the fourth straight quarter of positive earnings surprise, when it reported first-quarter fiscal 2018 results. Total sales also came ahead of the consensus mark after falling short of the same in the preceding two quarters.
The company highlighted that impressive performance across Macy’s, Bloomingdale’s and Bluemercury brands boosted results. Management hinted that North Star Strategy, comprising merchandising and marketing activities, bode well for the company. Sturdy results prompted this US department store chain to lift sales and earnings view for fiscal 2018.
Let’s Delve Deep
Macy’s posted adjusted earnings of 48 cents a share, excluding impairment and other costs, compared with 26 cents reported in the year-ago period. Also excluding gain from sales of assets, earnings came in at 42 cents, up from 12 cents delivered in the prior-year quarter. We note that the bottom line comfortably surpassed the Zacks Consensus Estimate of 36 cents.
This Cincinnati, OH-based company generated net sales of $5,541 million that beat the Zacks Consensus Estimate of $5,444 million and increased 3.6% year over year. Comparable sales (comps) on an owned plus licensed basis jumped 4.2%, while on an owned basis comps rose 3.9%. Strategic investments across stores, technology and merchandising are likely to cushion comparable sales growth.
In an attempt to augment sales, profitability and cash flows, the company has been taking steps such as cost cutting, integration of operations as well as developing its e-commerce business. The company registered double-digit growth in digital business.
Moreover, as part of the store rationalization program, the company plans to shut down underperforming stores. These are seen as part of the company’s endeavors to better withstand competitive pressure from both brick-and-mortar discount stores and online retailers, such as Amazon.
Coming back to the results, adjusted operating income surged 17.4% to $257 million, while adjusted operating margin increased 50 basis points to 4.6%.
Other Financial Aspects
Macy’s, which reached an agreement to end the joint venture with Fung Retailing Limited, ended the quarter with cash and cash equivalents of $1,531 million, long-term debt of $5,857 million, and shareholders’ equity of $5,821 million, excluding non-controlling interest of $20 million.
FY18 View
Macy’s now projects comps on an owned plus licensed basis to increase in the band of 1-2%, while comps on an owned basis are expected to be 20-30 basis points lower than the same. Total sales are anticipated to range from 1% decline to 0.5% increase in fiscal 2018.
Management now envisions adjusted earnings in the range of $3.75-$3.95 per share for fiscal 2018, up from prior view of $3.55-$3.75.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON M.
Portfolio Manager Executive Summary [Note: only highlighted material has been changed]
Macy's Inc. (M), through its subsidiaries, operates department stores under Macy's and Bloomingdale's outlets in the United States as well as online. Its retail stores sell a range of merchandise, including men's, women's, and children's apparel as well as accessories, cosmetics, home furnishings, and other consumer goods.
Of the 12 firms covering the stock, one provided positive rating, 10 assigned neutral ratings while one had a negative stance.
The outlook of the firms toward Macy’s is dealt with in the following paragraphs:
Neutral or equivalent outlook (83.4%; 10/12 firms): The firms believe that Macy’s, with its improved merchandise assortments and enhanced customer service, remains well positioned for growth. However, these firms are somewhat cautious about the company’s long-term prospects on the basis of secular headwinds in the department store space. Moreover, a saturated store base leaves little room for expansion.
On the contrary, Macy’s has been undertaking initiatives such as Macy’s Backstage off-price business, the introduction of Thalia Sodi private brand and expansion of Bluemercury. Additionally, the company is entering into deals and collaborations to widen its operations and customer base. Also, Macy’s has announced slew of measures regarding stores closures, cost containment, real estate strategy and investment in omni-channel capabilities to enhance its sales, profitability and cash flows.
Positive or equivalent outlook (8.3%; 1/12 firm): The firm remains optimistic about the strategic initiatives undertaken by the company including My Macy’s, omni-channel integration and Magic Selling. The firm believes that trends at Macy’s are improving, with the ‘My Macy’s’ localization initiative gaining traction, driving traffic and comparable store sales (comps).
Moreover, the firm thinks that Macy’s continued focus on enhancing customer experience through better product assortment will help it drive sales and profitability. Further, the company’s restructuring initiatives are likely to generate cost savings. Also, the firm expects the company to benefit from enhanced IT systems, increased private and exclusive label penetration, and improved expense leverage from cost controls.
Moving ahead, the firm is optimistic about the company’s prospects, given its dominant market position, successful omni-channel initiatives, the expansion of Bluemercury, and impressive range of products. The firm expects improved sales to leverage operating costs, which in turn, are likely to augment earnings and simultaneously generate significant cash flow.
May 10, 2018
Overview [Note: only highlighted material has been changed]
The firms identified the following factors for evaluating the investment merits of Macy’s:
Key Positive Arguments / Key Negative Arguments· Macy's restructuring plan including store closures, cost containment, real estate strategy and investment in omni-channel capabilities are likely to drive growth and generate savings.
· It continues to exhibit strong cost control despite the incremental expenses incurred to undertake the re-branding initiative.
· Management is focused on several strategic initiatives, which will drive solid long-term growth for the company. / · Broadline retailing is a mature and highly competitive industry, and Macy’s faces stiff competition from other specialty and discount retailers.
· Macy's remains vulnerable to a slowdown in the economy. Much of the merchandise that upscale department stores sell is discretionary in nature.
· The company’s expansion in the regions it already serves could cannibalize sales performance and lower traffic count, at its existing stores in the areas.
Macy’s, Inc. (M) is one of the leading department store retailers in the United States. This Cincinnati, OH-based company has an additional office in New York. Through its retail stores and Internet websites (macys.com and bloomingdales.com) Macy’s trades in a wide range of merchandise, including men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods in 44 states, the District of Columbia, Guam and Puerto Rico. In fact, the company operates approximately 690 department stores under the banner Macy’s and Bloomingdale’s, and about 160 specialty stores that include Bloomingdale’s The Outlet, Bluemercury and Macy’s Backstage. In Dubai and Kuwait, Bloomingdale’s is operated by Al Tayer Group LLC under a license agreement. The company’s website is www.macysinc.com. Its fiscal year ends on Jan 31.
May 10, 2018
Long-Term Growth [Note: only highlighted material has been changed]
Macy's premier chains – Bloomingdale’s and Macy’s – are two of the most recognized names in the department store industry. However, these chains are not immune to the challenges faced by the department store industry, and accordingly, the company has implemented strategic initiatives to improve its performance.
Macy’s sustained focus on price optimization, inventory management, merchandise planning, and private label offering positions it to drive traffic, meet customer-oriented demand and improve in-store shopping experience. Moreover, the firms believe that with the development of trendy products, in line with fashion, the company is likely to witness improvement in comps in the long run. Also, some firms believe that Macy’s has the ability to deal with margin pressure.
Additionally, the company launched international shipping in different continents around the globe which will help enhance its position, offering its international customers a wide range of collections in apparel, jewelry and home products. Moreover, the move is highly accretive to the company’s online sales as it will enable Macy’s to generate additional sales and broaden its existing customer base worldwide. It will also enhance the visibility and reputation of Macy’s as a global firm offering great fashion and value.
Further, Macy's has adopted an extensive restructuring plan that involves store closures, cost containment, real estate strategy and investment in omni-channel capabilities. Additionally, it will realign operations and focus on curtailing costs. Additionally, at local district level, Macy’s through new regional teams is trying to better understand the needs of merchandise localization.
Macy's has also been widening its operations via deals and collaborations to increase its customer base. In fact, the company entered into an agreement with The Men’s Wearhouse, Inc. to open licensed tuxedo rental shops within its stores. Also, it entered into a deal with Luxottica Group, the designer, manufacturer and distributor of fashion, luxury and sports eyewear, whereby the latter has opened LensCrafters licensed departments in Macy’s outlets.
Going forward, firms remain optimistic about Macy’s owing to its strategic endeavors, including cost containment, closure of underperforming stores, and integration of operations as well as development of e-commerce business. These will help the company in capturing greater sales and increasing profitability and cash flows.
May 10, 2018
Target Price/Valuation [Note: only highlighted material has been changed]
Rating DistributionPositive / 8.3%¯
Neutral / 83.4%
Negative / 8.3%
Avg. Target Price / $28.50
Maximum Target / $42.00
Minimum Target / $21.00
No. of Analysts with Target Price/Total / 10/12
Risks to the price target include successful execution of the My Macy’s strategy, general consumer spending trends, mall traffic trends and fashion trends in apparel and home furnishings, and strong competitive pressure resulting in an overall secular decline in the department store industry.
Recent Events [Note: only highlighted material has been changed]
On Feb 27, 2018, Macy’s reported adjusted earnings of $2.82 per share, which surpassed the Zacks Consensus Estimate of $2.69 and surged 39.6% from $2.02 in the year-ago period. The company’s net sales of $8,666 million that came below the Zacks Consensus Estimate of $8,724 million but increased 1.8% year over year (y/y).
Revenues [Note: only highlighted material has been changed]
Macy’s generated net sales of $8,666 million in 4Q17 that increased 1.8% y/y. Comparable sales (comps) on an owned plus licensed basis increased 1.4%, while on an owned basis comps rose 1.3%.
In an attempt to augment sales, profitability and cash flows, the company has been taking initiatives such as cost cutting, integration of operations and developing its e-commerce business. Notably, Macy’s registered double-digit growth in digital business for the 34th successive quarter.
Guidance
Macy’s anticipates comps on both an owned and an owned plus licensed basis are expected to be flat to up 1% for fiscal 2018. However, it envisions total sales to decline in the band of 0.5-2%.
Margins [Note: only highlighted material has been changed]
Macy’s gross profit in 4Q17 grew 1.3% y/y to $3,308 million, while gross margin contracted 10 basis points to 38.2%. On the contrary, adjusted operating income surged 31.5% to $1,397 million and adjusted operating margin increased 360 basis points to 16.1%.
In the recent past, Macy's also announced a few more measures to support growth plan. Under this plan, the company will shut down 11 stores in the early part of 2018 and will not only hire employees but also retrench at some stores. Further, the company will streamline some of the non-functional stores. These efforts will result in annual cost savings of $300 million beginning 2018.
Earnings per Share [Note: only highlighted material has been changed]
Macy’s posted adjusted earnings of $2.82 per share in 4Q17 that surged 39.6% from $2.02 reported in the year-ago period. Higher sales and lower SG&A expenses aided the bottom line.
Guidance
Management now expects adjusted earnings in the range of $3.55-$3.75 per share for fiscal 2018.
Research Analyst / Rashmi JaiswalCopy Editor / Rajani Lohia
Content Ed. / Rajani Lohia
QCA / Sumit Singh
Lead Analyst / Sumit Singh
No. of brokers reported/Total brokers
Reason for Update / Flash