Macy’s: Always on Sale

It is tough to be optimistic about department stores generally—and Macy’s especially

By guest author Jinjoo Lee from the Wall Street Journal

Macy’s M belongs to an endangered species in the world of retail. That comes with one benefit: Every sign of life can be enough to keep investors on board.

Macy’s did have a better holiday season than expected. Net sales were down 18.7% in the quarter ended Jan. 30 compared with a year earlier, better than the 22.6 % decline that analysts polled by Visible Alpha expected. But that was still a steeper revenue decline than the 14.4 % drop that department stores around the country experienced over the same period, according to data from the U.S. Census Bureau.

The retailer also benefited from fewer product returns compared with previous holiday seasons—thanks in large part to customers buying less clothes. Home, beauty, jewelry and watch categories were popular this holiday season.

Macy’s 2

Net income was a positive surprise, coming in at USD 160 million compared with the USD 14.3 million analysts expected. That was mostly thanks to greatly reduced operating expenses. The department store chain reduced operating costs by USD 900 million for the full year and expects to keep expenses at that depressed level going forward. For the full year, Macy’s incurred a net loss of USD 3.9 billion.

It is important to remember that behind Macy’s cost reductions are expectations that it will sell less going forward. Macy’s thinks fiscal 2021 net sales will be 15.5% lower than fiscal 2019 levels at the high end of its guidance. That’s not a high bar: Sales also declined in 2019.

Macy’s 3

So it makes little sense that Macy’s share prices are almost back to their pre-pandemic levels. Lower costs won’t guarantee better profitability either. As a percentage of sales, operating expenses are expected to increase this year compared with 2019 levels.

There are other caveats buried in Macy’s good news. The holiday season brought in 7 million new customers, many of them younger than the existing customer base and the majority coming to Macy’s through online channels. The bad news was that its existing customers didn’t show up in the same way, with active customer count declining. Given supply crunches during the holiday season, the new customer numbers should be taken with a pinch of salt: There is a possibility that some of the new customers were there as a last resort and won’t return.

Macy’s share price is cheap relative to peers, trading at roughly 0.23 times forward revenue, roughly half the multiple of Kohl’s and Nordstrom. But there is a good reason for that discount: Macy’s underperforms both competitors on operating margins and returns on invested capital.

However you try to spin it, it is hard to come up with a compelling reason to bet on Macy’s.