Macy’s, Inc.

 

M Details
 
Operational Efficiency to Drive Bottom-line Growth: Macy’s, Inc. (NASDAQ: M) is one of the leading retail operators in the U.S., managing ~680 department stores and ~190 specialty stores across 43 states. On 4^th February 2020, the company announced the appointment of John T. Harper for the post of Executive Vice President and Chief Operations Officer.
 
The company recently announced that it will adopt a 3-years Polaris strategy, where the company will cut down its less-profitable segments. As per the strategy, the business will decrease its corporate and support function staff of 9%, or ~2,000 positions. The strategy is focused on optimizing its store portfolio through the growth treatment of stores in the best malls and will close ~125 stores in lower-tier malls within the next three years. As part of the marketing strategy, the company is dedicated to promote higher-margin private brands’ businesses with plans to build four $1 billion brands.
 
Q3FY19 Operational Highlights for the Period ended 02 November 2019: M declared its quarterly reports, wherein the company posted net sales of $5,173 million, as compared to $5,404 million in pcp. The third quarter sales were impacted due to the late arrival of cold weather and ongoing soft international tourism and weaker than expected performance across the lower-tier malls. The business witnessed a temporary impact within the e-commerce segment due to its ongoing work-in-progress of the website. Cost of sales as a percentage of revenue stood at 60% of net sales as compared to 59.7% in the previous corresponding quarter. The slight decline in margin was attributed to lower sales which was partially offset by higher delivery expense. Selling, general and administrative expenses came in at $2,202 million, marginally lower than Q3FY18 of $2,255 million. Selling, general and administrative expenses as a percentage of net revenue stood at 42.6%. Operating income, during the quarter, stood lower at $52 million from $147 million in the previous corresponding period. The decrease in the operating income was due to the cumulative effect of higher operating expenses.
 

 
Key Highlights of Q3FY19 Income statement (Source: Company Reports)
 
Guidance: As per the preliminary fourth quarter and full-year 2019 Sales Results, the company expects 4QFY19 and FY19 sales to come in at $8.3 billion and $24.5 billion, respectively. The company expects a de-growth in Owned and Owned plus licensed stores at 0.8% and 0.7%, respectively, for FY19. The company is anticipating FY20 adjusted diluted earnings per share between $2.45 to $2.65. The company expects to generate annual gross savings of ~$1.5 billion through its Polaris strategy by the end of FY22.
 
Valuation Methodology: EV to Sales Multiple Approach
 

EV/Sales Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months
 
Stock Recommendation:The stock of M closed at $17.45 with a market capitalization of $5.39 billion. The stock is trading at the lower band of its 52-week trading range of $14.11 to $26.48. Sales within the mattresses, fine jewelry, fragrances, dresses, men’s active and men’s tailored segment came stronger during the third quarter of FY19.The business is looking to cut down its expenses and focus on high-margin products to deliver business growth. During the period, the mobile segment added new friendly features like updated store maps to navigate a customer's local store as well as functionality enabling quick pick-up and pay. Based on the aforesaid facts, we have valued the stock using EV to Sales based relative valuation method and arrived at a target price with an upside of double-digit (in % terms). Considering the current trading levels, valuation and business prospects, we recommend a “Buy” rating on the stock at the closing price of $17.45 per share, up 5.95% on 05 February 2020.

 
 
 
M Daily Price Chart (Source: Thomson Reuters)

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