Macy's Market Share Continues to Erode
The no-moat retailer has little defense against off-price and online competitors.
Although no-moat Macy's (M) 1% comparable sales growth in November and December was a significant improvement from the 1% average annual decline over the past three years, we attribute most of this upside to a healthy retail environment rather than company-specific initiatives. Consistent with our no-moat rating, we view Macy’s as having little defense against off-price and online competitors. In our opinion, holiday data supports this, with growth still trailing competitors (Mastercard SpendingPulse estimates holiday sales growth just shy of 5%).
We think Macy’s is still in a period of deep investment. The company announced the closure of 11 Macy’s stores, which results in the completion of 81 of the approximately 100 planned store closures announced in August 2016. And even though management has taken actions to improve efficiency, the company expects the annual expense savings of $300 million (beginning in fiscal 2018) to be reinvested in the business.
Therefore, we see no change to our $28 fair value estimate. Our fiscal 2017 assumptions are slightly below updated guidance; we call for a 4.2% revenue decline and $3.57 in adjusted earnings per share versus guidance for a 3.6%-3.9% revenue decline and adjusted EPS of $3.59-$3.69. However, our long-term outlook is intact at this time, with expectations for a 2% average annual revenue decline and the adjusted operating margin falling from high-single-digit to mid-single-digit levels over the next five years. We view the shares as fairly valued.
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Bridget Weishaar does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.