Case Study on Macy's (M) with Nobias technology
1) Macy’s shares are down by more than 30% on a year-to-date basis.
2) The company reported earnings this week, beating Wall Street expectations on the top and bottom lines.
3) Macy’s lowered its full-year guidance during its Q2 report.
4) Yet, credible analysts believe that the stock’s valuation is too low, with an average price target that implies 52% upside potential.Title: Macy’s SEO
Macy’s (M) is the biggest U.S. department store chain and one of the most iconic names in the American retail space. The company was founded in 1858, moved into its landmark location in Herald Square in 1902, and the company’s red star logo has been a part of popular culture in the United States for well over a century. However, in recent years, shares of this once prominent department store have struggled due to the secular headwinds created by the growing eCommerce trend. Macy’s shares are down roughly 9.9% during the last 5 years. During this same period of time, the S&P 500 is up by more than 71.5%.
During the trailing twelve months, Macy’s is down by 19.2%, once again, trailing the S&P 500, which is down by only 6.55% during this period. On a year-to-date basis, M shares have fallen by 30.39%. During 2022 thus far, the S&P 500 is down by approximately 12.2%. And yet, after all of this underperformance, the credible Wall Street analysts that track Macy’s shares believe that the beaten down stock has upside potential with an average price target that implies strong double digit upside.
M Aug 2022
Macy’s reported its second quarter earnings last week, beating Wall Street consensus estimates on both the top and bottom lines during its 8/23/2022 release; however, management cut forward looking guidance. Coming into Macy’s Q2 report, The Alpha Sieve, a Nobias 4-star rated author, published an earnings preview on the stock at Seeking Alpha.
The author highlighted the difficult macro environment that retailers like Macy’s find themselves in, stating, “Elevated fuel costs too will likely leave their mark on Macy’s cost dynamics, although I do suppose it helps that they have a lower amount of digital sales versus what it was last year.”
Alpha Sieve cites another potential profit-related headwind, writing, “Also consider that Macy’s higher minimum wage of $15 (per hour) for around 100,000 US employees would have come into play by May (the average base pay will be closer to $17 an hour)”.
The Alpha Sieve also touched upon Macy’s inventory issues, stating, “they had almost $5bn of merchandise inventory on their books at the end of Q1, up by 17% on an annual basis and 13% on a quarterly basis”. The author wrote that inventories “will be needed [sic] to be wound down at lower prices, particularly in some overstocked categories such as activewear and soft home categories.”
However, despite these operational issues and touch macro headwinds, The Alpha Sieve concludes that Macy’s is an attractive value. They wrote, “Whilst Macy’s forward EV/EBITDA multiple has grown pricier by 6% (4.27x) since the May 2022 update (4.01x), its discount relative to its peers in the department stores arena has only widened; previously Macy's could be picked up at a 19% discount to the average multiple of its peers (4.94x); now it can be picked up at a 21% discount (5.39x).”
Rachel Fox, a Nobias 4-star rated author, covered Macy’s Q2 results in a recent article published at investors.com. Regarding Macy’s earnings results, Fox wrote, “Analysts expected Macy's earnings for the quarter to fall 33% year over year to 86 cents per share. But the retailer's earnings per share fell 22% to $1. Analysts also saw a 2.9% decline sales [sic], to $5.49 billion, down from $5.65 billion in 2021. But revenue only fell slightly to $5.6 billion.” She said, “Retail stocks have generally reported mixed results over the past week as inflation pressures cut into consumer spending.”
Fox noted that Macy’s is showing technical strength, stating, “The stock remains above its conjoined 50-day and 21-day lines.” However, she concluded, “But Macy's still has a lot of repair work to do before it becomes a legitimate candidate for investors. Shares maintain a low 26 RS Rating at this time.”
SGB Media also covered Macy’s Q2 earnings in an article titled, “Macy’s Cuts Outlook Despite Q2 Beat”. SGB media covered a slew of quarterly highlights; its report read:
Macy’s comparable sales were down 2.9 percent on an owned basis and down 2.8 percent, on an owned-plus-licensed basis.
43.9 million active customers shopped the Macy’s brand, on a trailing twelve-month basis, a 7 percent increase compared to the prior year.
Star Rewards program members made up approximately 70 percent of the total Macy’s brand-owned plus licensed sales on a trailing twelve-month basis, up approximately 5 percentage points versus the prior year.
The company continued to see strength in occasion-based categories, including career and tailored sportswear, fragrances, shoes, dresses, and luggage.
Bloomingdale’s comparable sales on an owned basis were up 8.8 percent and on an owned-plus-licensed basis were up 5.8 percent. 4.0 million active customers shopped the Bloomingdale’s brand, on a trailing twelve-month basis, a 14 percent increase over the prior year. Results were driven by strength across women’s, men’s and kid’s contemporary and dressy apparel as well as luggage.
Bluemercury comparable sales were up 7.6 percent on an owned and owned-plus-licensed basis. Approximately 700,000 active customers shopped the Bluemercury brand, on a trailing twelve-month basis, a 9 percent increase over the prior year.
SGB touched upon inventory trends, stating, “Inventory was up 7 percent year-over-year and down 8 percent versus 2019, reflecting disciplined inventory management in an environment of continued supply chain volatility. Where it had flexibility, the company cut receipts to manage inventory levels in line with consumer demand. However, in certain categories inventory levels remain elevated due to reduced year-over-year sell-throughs since Father’s Day driven by the industry-wide levels of excess inventory and a slowdown in consumer discretionary spend.”
The analyst continued, “The company is targeting appropriate inventory levels by the end of the year and will continue to flow fresh product in those categories in which customers are signaling demand. Simultaneously, the company is taking the required markdowns to clear aged inventory, in seasonal goods, private brand merchandise and pandemic-related categories, such as active, casual sportswear, sleepwear, and soft home.”
The SGB report also put a spotlight on Macy’s disappointing guidance. The firm stated, “The updated guidance calls for:
“Sales in the range of $24,340 million to $24,580 million, down from guidance in the range of $24,460 million to $24,700 million previously;
Adjusted EBITDA as a percent of sales to be approximately 10.5 percent, down from 11.2 percent to 11.7 percent previously; and
Adjusted diluted earnings per share in the range of $4.00 to $4.20, down from $4.53 to $4.95 previously.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Since Macy’s Q2 results were reported, Paul Lejuez of Citi, a Nobias 5-star rated analyst, lowered his price target for M shares from $23.00 to $21.00.
Theflyonthewall.com highlighted Lejuez’s analyst note, stating, “The company's Q2 earnings were above expectations, despite a slowdown toward the end of the quarter and the annual guidance reduction was inline with what many were expecting, Lejuez tells investors in a research note. As a mall-based player selling discretionary products, Macy's "may continue to feel the pinch if consumers concentrate shopping around occasions," says the analyst.”
51% of recent articles published by credible authors (individuals with 4 or 5-star ratings by the Nobias algorithm) have expressed a “Bullish” bias, implying a neutral stance. However, the credible analyst community’s consensus implies upside ahead. Right now, the average price target being applied to M shares by the credible analysts that the Nobias algorithm tracks is $29.00/share. Today, M trades for $17.06/share; therefore, that average price target implies upside potential of approximately 55%.
Disclosure: Nicholas Ward has no M position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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