Department store retailer Macy’s (M) announced sales results for November and December, along with an update to its annual sales and earnings guidance. The shares fell 18% in January 10th trading.
Driving the share price decline was the disappointing guidance in full-year same-store sales. The company said it expects an increase of about +2%, lower than their pre-holiday guidance provided in November of +2.3% to +2.5%. Management commented that while the early holiday sales were strong, the pace slowed in mid-December and recovered only during the week of Christmas. A warehouse fire and the effects of a change in a promotional event may also have contributed to the weakness.
We view the news and sharp price decline not so much as an end to the Macy’s turnaround, but rather as an unwinding of overly-enthusiastic investor expectations. Compared to the company’s original full-year 2018 guidance provided last February, the new revenue guidance is clearly better. The original guidance called for same store sales of “flat to +1.0%”, and net sales of “-2% to -5%”. So, the +2% comp guidance and “Approximately flat” net sales guidance shows that the company is doing better than they originally expected.
The company’s November guidance was simply too optimistic. Even though the shares fell 10%, to about $32, immediately following the November update, investors appeared to remain confident in a strong holiday period, as the shares held steady at this price until yesterday’s drop.
We put part of the blame on management. “Managing the Street” is a real skill, and Macy’s November update didn’t leave enough of a margin for error. In hindsight, they probably shouldn’t have provided that update. We hope they will be more conservative in the future.
Earnings update: worse, and better
The company also reduced its full-year per-share earnings guidance to $3.95-$4.00, down from their November guidance of $4.10-$4.30 and below the current consensus estimate of $4.23. Investors worry that the company isn’t converting enough of its revenues into profits. However, compared to their February 2018 guidance of $3.55 -$3.75, the update clearly is better. Similar to their sales guidance, Macy’s over-stepped prudence with their earnings guidance in November.
How the announcement affects our view of the turnaround
Macy’s is making progress with their biggest challenge: remaining relevant when mall traffic is declining. Their various initiatives, including better merchandising, new retailing concepts (Backstage, others), better promotions and better real estate management are improving the company’s operating and financial outlook compared to a few years ago. Challenges clearly remain: in a near-ideal environment for retailers, with record-low unemployment, low gasoline prices, rising wages and high consumer confidence), Macy’s should probably be posting same-store sales growth in the 3-4% range.
Other retailers, including Target and Kohl’s, have had similar struggles. Macy’s needs to work harder given the added burden of their mall focus, but their slow/steady progress is more encouraging than their volatile stock price suggests.
At under $26, the stock is nearly 50% higher than its $17.53 depths of late 2016. Macy’s shares remain a solid value, trading at about 4.5x EBITDA, supported by strong free cash flow, improving capital efficiency and a pro-active management. The generous 5.8% dividend yield appears solid, helping mitigate the share price volatility.
We continue to rate Macy’s (M) shares a Buy.
Disclosure: An employee of the Publisher owns M shares.