Just when it looked like a bottom was forming in Macy’s Inc (NYSE:M) stock, the bottom fell out … again.
After holding around the $29-level for more than a month, M stock is trading down around 14% on Thursday to under $25 after the company reported a terrifically bad quarter. Macy’s earnings disappointed on just about every metric, and the misses were wide.
Macy’s stock now trades at a 52-week low. The headwinds are huge and growing, but the contrarian buy thesis is also getting more attractive.
Here’s my breakdown of M stock.
The Bad About Macy’s Stock
Macy’s troubles all start on the topline. Consumers continue to shop less and less at Macy’s stores, and continue to migrate more towards alternative e-commerce channels like Amazon.com, Inc. (NASDAQ:AMZN). This isn’t new news for investors, but its surprising to see the trend accelerate given how much sales have already fallen at M.
Comparable same-store sales for Macy’s fell 4.6% in the quarter. That is as bad a comp number Macy’s has reported since, well, last Q1 when comps fell 5.6%. That means on a two-year stack basis, comparable same-store sales are down 10.2%. Last quarter, comps were down just 6.4% on a two-year stack basis. The quarter before that they were down 6.3%, and in the previous quarter they were down just 3.5%.
Macy’s sales headwinds are only getting bigger, and that makes calling a bottom pretty difficult. Management, though, seems to think a bottom is near. The guide calls for comps to be down about 2.5% this year versus a 2.9% decline last year. That would imply pretty big expectations for the next three quarters, but given how much sales have fallen already, it’s not unlikely that comp declines do moderate later this year and into next year.
Nonetheless, sales will likely be down somewhere around 4% this year, and will continue to fall in the low single-digit range over the next 3 to 5 years. M’s top line outlook isn’t rosy.
That is especially troubling considering Macy’s has about $6.7 billion in debt on the balance sheet (that is only slightly lower than the company’s current market-cap). Around $1.2 billion in cash is good, but against $6.7 billion of debt, M has a net debt situation of about $5.5 billion. With sales in free-fall and gross margins compressing, that debt-load could be problematic.
The Good About Macy’s Stock
There are also some positives to note about M stock in this transition period.
The company is getting lean and costs are coming out of the system. Despite sales falling 7.5%, Macy’s benefited from 10 basis points of SG&A leverage. That means that despite sales continuing to fall, the company is still reporting solidly positive earnings. That will continue into the foreseeable future for Macy’s and lessens concerns about the company’s debt-load.
M also has great cash flows. Macy’s generated operating cash flow in excess of $230 million in the quarter. That is up big year-over-year. Capex is also down year-over-year, so the free cash flow profile is actually quite attractive.
It is also encouraging to see Macy’s put more of a focus on its off-price brand, Backstage. It is no big secret that off-price retailers like TJX Companies Inc (NYSE:TJX) and Ross Stores, Inc. (NASDAQ:ROST) have been stealing market share from big department stores recently. Macy’s is making an aggressive plunge into this space by 2018, which should help the beleaguered department chain re-capture traffic share and potentially drive positive comps.
Bottom Line on M Stock
Macy’s isn’t dying, but it is in a huge transition period. M stock accurately reflects this, and I’m not sure there is much upside over the next 12 months.
Excluding one-offs, earnings are expected to come in around $3 per share this year. That means the stock is trading around 8-times this year’s earnings estimate. At first, that is extremely attractive, but the company has about $18 per share in net debt. Adding that back in, M stock is trading around 14-times this year’s earnings estimate.
That isn’t great, considering earnings are down year-over-year and don’t have a terribly attractive five-year growth outlook. The bottom may be in, but the upside also looks limited.
I’m hoping shares fall some more, and then I’ll look at buying into the beaten up stock.
As of this writing, Luke Lango was long TJX, AMZN, and ROST.
