Macys’ Q2: A Turnaround In The Works

 

Q2 EPS beats by $0.09; revenues by $130 million.

Macy’s is closing down 100 stores while reporting strong growth in digital sales.

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Company’s stock presents an upside and attractive yield over the next year.

Macy’s (NYSE:M) stock has been slowly recovering in 2016, but is still in negative territory. With its Q2 earnings release, the company continues to address the overcapacity in the brick and mortar retail sector. Macy’s announced it is closing 100 stores, and saw shares rise 17% on Thursday.
Earnings report

Macy’s delivered Q2 earnings of $0.54, beating expectations by $0.09. Second quarter sales were down 4% compared to last year, but the company seems to be proactively managing the shift in the retail landscape and its dwindling fortunes. With the announcement of store closings, the shares rose 17% Thursday. YTD sales are down 5.7% compared to 2015.

RELACIONADA: Macy’s, Inc. Reports Second Quarter Earnings and Reaffirms Full-Year Guidance

Operating income totaled $117 million for the second quarter, representing 2% of total sales, mostly from the $249 million asset impairment charge the company took due to the store closings. Even without the charges, the company’s operating income as a percent of sales was down to 5.7% compared to 6.8% reflecting the difficulty of doing business in the sector right now.

Going forward the company expects 2016 comparable sales to be down 3-4%. The company has suspended its share repurchase program after the dismal first quarter earnings though retains the option to do so. One of the bright spots was the company’s acquisition of Blue Mercury, a long standing store that has shown promising results.

With the store closings, there are serious concerns regarding the estimated billion dollars in lost sales. Management will provide further guidance on these numbers as well as specific details on store closings as the year progresses. The company has seen promising results with its jewelry roll out, Backstage and Last Act initiatives.

Going forward

Macy’s omnichannel strategy is gaining traction with consistent double digit growth.

With the increased focus on mobile, it is worth nothing that 86% of all U.S. retail sales still occur in store. As major retailers report losses, it helps to remember that a lot of it is overcapacity in the industry shaking itself out. The jump in Macy’s shares on account of the announcement for store closings and the subsequent plunge in mall operator shares reflect this reality. The CEO noted the following on the earnings call:

Retailing is changing, there’s no doubt about it. Our company is committed to being tomorrow’s leader in omni-channel retailing. We will strike the right balance between stores and digital.

We strongly believe that this is where the future of retailing lies. As Amazon has shown, pure play e-commerce is not the end game. The company’s plans to increase its physical presence via bookstores underscores this idea.

On a separate note, retail giants like Macy’s are sitting on prime real estate that is worth much more than the cash flows generated. As highlighted below, it is refreshing to know the company is taking note of this and is planning accordingly.

We also provided an update today on our pursuit of various opportunities to extract value from our real estate portfolio consistent with our long-term store location strategy as well as our balance sheet leverage objectives. For some time now, we have been examining opportunities for four large downtown stores in major cities, Herald Square, Union Square, State Street in Chicago, and downtown Minneapolis.

Valuation

The company share price has jumped but is still in negative territory YTD. Forward P/E trades at 10x and dividend yield is 4.4%. In a low interest rate environment, the yield is very attractive and the company continues to provide detailed guidance giving high visibility into cash flows.
Our take

The retail industry is being upended by e-commerce pure plays, but we firmly believe the future is in omnichannel specialty retail. Macy’s has a huge ship to turn around, but management is checking all the right boxes. They are closing down underperforming stores, investing in more specialty retail, reporting strong digital sales growth and planning to monetize prime real estate properties. We think it is worth holding the stock to see how the company performs over the remaining part of the year. The attractive 4.4% yield makes the wait worthwhile.

Fuente: Seeking Alpha


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