Macy’s (M) Stock Trades Higher Despite Weak Sales Results

The shares of Macy’s are trading higher today despite reporting weak comparable sales performance in November and December last year. The stock price of the retailer climbed more than 2% to $36.95 per share around 1:27 in the afternoon in New York.


Macy’s sales performance

According to Macy’s, its combined comparable sales in November and December 2015 declined 4.7% compared with the same period a year ago.

In a statement, the company’s CEO Terry Lundgren explained that the holiday selling season was challenging for the retail industry. He blamed the warm weather in the northern climate zones as the primary reason for the approximately 80% year-over-year declines in the company’s comparable sales. According to him, the company experienced “shortfalls in cold-weather goods.”

He added that Macy’s was also impacted by the lower spending of international tourists due to the strong dollar.

The company expected a 4.7% decline in comparable sales on an owned plus licensed basis for the fourth quarter and a drop of 2.7% for the full fiscal 2015.

Macy’s expected to report earnings of around $2.18 to $2.23 per share for the fourth quarter and around %3.88 to $3.90 per share for the full year.

The company is scheduled to report its fourth-quarter earnings and sales results on Tuesday, February 23, 2016.

Macy’s cost efficiency plans

Macy’s issued a separate press release outlining its cost efficiency plans, which overshadowed its poor sales performance. The retailer said it would implement its cost efficiency and process improvement measures early this year.

The company plans to reduce its SG&A expense by approximately $400 million, but it will keep investing in growth strategies. Its objective is to re-attain an EBITDA rate of 14% (as a percentage of sales) over time.

It will consolidate the grouping of its existing Macy’s store into five regions and 47 local districts and other field support functions. The company will close 40 Macy’s stores out of its 770 stores.

The retailer will implement job cuts at Macy’s and Bloomingdale’s stores nationwide. It will eliminate 3,000 store associates, 600 positions in back-office organizations, and 750 employees at its call center in St. Louis.

Macy’s also engaged the services of Eastdil Secured to approach potential interested parties to form a partnership or joint ventures for the company’s mall-based properties. The real-estate focused investment firm will be assisted by Credit Suisse and Goldman Sachs Group.

“In light of our disappointing 2015 sales and earnings performance, we are making adjustments to become more efficient and productive in our operations. Moreover, we believe we can operate more effectively with an organization that is flatter and more agile so we can pursue growth and regain market share in our core Macy’s and Bloomingdale’s omnichannel businesses faster and with more intensity,” said Lundgren.

Analysts’ reactions

BMO Capital Markets analysts Wayne Hood and Shannon Coyne reduced their 2015 earnings estimate for Macy’s to $3.43 per share from $3.80 per share. They also cut his 2016 EPS estimate to $4.19 per share from $4.30 per share.

Although they reduced their EPS estimate, Hood and Coyne issued a Buy rating on the stock with a price target of $53 per share. According to them, Macy’s is their top pick among the department store operators on their coverage.

According to them, Macy’s is currently trading at 8.6x their revised 2016 EPS estimate or 36% discount to the S&P 500 and 5.5x EV/EBITDA. The also noted that the stock’s 4% dividend yield is attractive than the US Treasury yields. It is also supported by a strong free cash flow outlook.

On the other hand, Analysts at Evercore ISI commented that it is unlikely for Macy’s to make more progress reducing its significant inventory overhang. It will be necessary for the company to implement further promotional activities before the spring.

They also believed that the magnitude of its cost reductions could impair its sales efforts and weigh on comps particularly during the initial transition period. The analysts perceive earnings pressure.

The analysts cut their 2015 EPS estimate to $3.90 per share from $4.21 and 2016 estimate to $3.70 from $4.15. They also reduced their 2017 estimate to $3.85 to $4.75.