Macy's (M 24.67, +0.31, +1.27%) is seeing a muted response to uninspiring fourth
quarter results in today’s trading session. The company’s stock fell 20% last
month after the company lowered guidance following a 0.7% increase in
comparable store sales during the holiday period.
Comparable sales grew 0.4% for the full fourth quarter versus 0.8% estimates and 1.3% growth last year. On the call, management said that a fire at its West Virginia fulfillment center and its decision to limit a pre-Christmas sales event to loyalty members only resulted in a 70-basis point headwind. Comp sales grew just 1.7% for the year.
After reporting negative comps eleven quarters in a row, the company’s return to positive comps five quarters ago was celebrated. Fiscal 2019 represented the first positive annual comp in four years, but the low single-digit growth was somewhat disappointing given the banner year we saw in consumer spending more broadly. Mastercard SpendingPulse reported that U.S. retail sales grew by 5.1% during the holiday, the best growth in six years.
Macy's forecasts that comps sales will be flat to up 1% this year with earnings down 25% as the company invests in growth avenues and digital initiatives. CFO Paula Price said that she sees a clear path to sustainable sales growth. However, on the call, management guided for gross margin pressure that would lessen throughout the year.
Strategic initiatives in what Macy’s terms its “North Star Strategy” include the company's loyalty program, off-price Backstage concept, in-store pickup expansion, vendor direct program, and Growth50 stores.
Still, the largest department store in the U.S. is facing secular headwinds. eCommerce continues to weigh on mall traffic. While the company is making progress on its strategic initiatives, online competition continues to increase, which means consumers have more choices than ever without going out of their way or dropping their phone. Online endeavors require investment, and digital sales face delivery expenses and a higher return rate. Meanwhile, discounters like TJX (TJX) and Burlington (BURL) continue to capture market share.
Therefore, with a $7.5 bln market cap, Macy's trades at less than 8x EPS or ~5x EV/EBITDA. Department stores Kohl's (KSS) and Nordstrom (JWN) face the same secular headwinds and trade at a slight premium of ~6x EV/EBITDA. Kohl's was smart to partner with Amazon to boost traffic. That company will report results on March 5. Nordstrom is the leading high-end department store while its discount Rack concept competes well in the discount market. Nordstrom will report on Thursday afternoon (February 28).
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