387956

Macy's (NYSE:M) Delivers Impressive Q1


Full Report / May 21, 2024

Department store chain Macy’s (NYSE:M) reported Q1 CY2024 results topping analysts' expectations, with revenue down 3.3% year on year to $5 billion. The company expects the full year's revenue to be around $22.6 billion, in line with analysts' estimates. It made a non-GAAP profit of $0.27 per share, down from its profit of $0.56 per share in the same quarter last year.

Macy's (M) Q1 CY2024 Highlights:

  • Revenue: $5 billion vs analyst estimates of $4.81 billion (3.9% beat)
  • EPS (non-GAAP): $0.27 vs analyst estimates of $0.17 ($0.10 beat)
  • The company slightly raised its revenue and EPS (non-GAAP) guidance for the full year at the midpoint and both are slightly above analyst estimates
  • Gross Margin (GAAP): 41.1%, down from 42.2% in the same quarter last year
  • Free Cash Flow was -$100 million compared to -$191 million in the same quarter last year
  • Same-Store Sales were down 1.2% year on year (beat vs. expectations of down 2.7% year on year)
  • Market Capitalization: $5.26 billion

With a storied history that began with its 1858 founding, Macy’s (NYSE:M) is a department store chain that sells clothing, cosmetics, accessories, and home goods.

As the name suggests, a department store offers a wide variety of merchandise organized into different departments or sections. Before the introduction of department stores in the 19th century, consumers would have to visit three different stores to buy a hat, a bottle of perfume, and pillows for their bedroom. While not the first department store, Macy’s was a pioneer.

Today, the core customer is a woman between the ages of 25 and 54 who is looking for name-brand products in a variety of categories. This customer can find prominent brands such as Calvin Klein, Levi’s, MAC, Cuisinart, and Sony in a Macy’s store or on its e-commerce site. Stores tend to be large, between 100,000 and 200,000 square feet, and serving as anchor tenants in many suburban malls. Common departments in a store include women’s/men’s/children’s apparel, beauty/cosmetics, and home goods. Additionally, Macy's has an active e-commerce presence, launched in 1997 as one of the first major retailers to offer online purchases.

Since the introduction of e-commerce, Macy’s and peers have faced increased competition. Evolving specialty retailers and developments such as fast fashion have also pressured the department store model.

Department Store

Department stores emerged in the 19th century to provide customers with a wide variety of merchandise under one roof, offering a convenient and luxurious shopping experience. They played an important role in the history of American retail and urbanization, and prior to department stores, retailers tended to sell narrow specialty and niche items. But what was once new is now old, and department stores are somewhat considered a relic of the past. They are being attacked from multiple angles–stagnant foot traffic at malls where they’ve served as anchors; more nimble off-price and fast-fashion retailers; and e-commerce-first competitors not burdened by large physical footprints.

Department or general merchandise retail competitors include Nordstrom (NYSE:JWN), Kohl’s (NYSE:KSS), and Dillard’s (NYSE:DDS).

Sales Growth

Macy's is one of the larger companies in the consumer retail industry and benefits from economies of scale, enabling it to gain more leverage on fixed costs and offer consumers lower prices.

As you can see below, the company's revenue has declined over the last four years, dropping 1.6% annually as its store count and sales at existing, established stores have both shrunk.

Macy's Total Revenue

This quarter, Macy's revenue fell 3.3% year on year to $5 billion but beat Wall Street's estimates by 3.9%. Looking ahead, Wall Street expects revenue to decline 6.2% over the next 12 months, a deceleration from this quarter.

Same-Store Sales

Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.

Macy's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 4.7% year on year. The company has been reducing its store count as fewer locations sometimes lead to higher same-store sales, but that hasn't been the case here.

Macy's Year On Year Same Store Sales Growth

In the latest quarter, Macy's same-store sales fell 1.2% year on year. This decrease was an improvement from the 7.9% year-on-year decline it posted 12 months ago. It's always great to see a business improve its prospects.

Gross Margin & Pricing Power

Gross profit margins are an important measure of a retailer's pricing power, product differentiation, and negotiating leverage.

Macy's has good unit economics for a retailer, giving it the opportunity to invest in areas such as marketing and talent to stay competitive. As you can see below, it's averaged a healthy 40.2% gross margin over the last two years. This means the company makes $0.40 for every $1 in revenue before accounting for its operating expenses.

Macy's Gross Margin (GAAP)

Macy's produced a 41.1% gross profit margin in Q1, marking a 1.2 percentage point decrease from 42.2% in the same quarter last year. One quarter of margin contraction shouldn't worry investors as a retailer's gross margin can often change due to factors such as product discounting and dynamic input costs (think distribution and freight expenses to move goods).

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Macy's generated an operating profit margin of 2.5%, down 2.2 percentage points year on year. We can infer Macy's was less efficient with its expenses or had lower leverage on its fixed costs because its operating margin decreased more than its gross margin.

Macy's Operating Margin (GAAP)

Zooming out, Macy's was profitable over the last two years but held back by its large expense base. Its average operating margin of 3.6% has been paltry for a consumer retail business. On top of that, Macy's margin has declined, on average, by 4.9 percentage points year on year. This shows the company is heading in the wrong direction, and investors were likely hoping for better results.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q1, Macy's reported EPS at $0.27, down from $0.56 in the same quarter a year ago. This print beat Wall Street's estimates by 60.2%.

Macy's EPS (Adjusted)

Wall Street expects Macy's to continue performing poorly over the next 12 months, with analysts projecting an average 17.5% year-on-year decline in EPS.

Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.

Macy's burned through $100 million of cash in Q1, representing a negative 2% free cash flow margin. The company increased its cash burn by 47.6% year on year.

Macy's Free Cash Flow Margin

Over the last eight quarters, Macy's has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.1%, subpar for a consumer retail business. However, its margin has averaged year-on-year increases of 1.1 percentage points, a great result that should improve its prospects.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Macy's five-year average ROIC was 2.6%, somewhat low compared to the best retail companies that consistently pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

Macy's Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last few years, Macy's ROIC has significantly increased. This is a good sign, and we hope the company can continue improving.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Macy's reported $876 million of cash and $6.03 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company's debt level isn't too high and 2) that its interest payments are not excessively burdening the business.

With $2.21 billion of EBITDA over the last 12 months, we view Macy's 2.3x net-debt-to-EBITDA ratio as safe. We also see its $129 million of annual interest expenses as appropriate. The company's profits give it plenty of breathing room, allowing it to continue investing in new initiatives.

Key Takeaways from Macy's Q1 Results

Revenue beat on better same-store sales. Margins were solid and EPS beat as well. As a result, the company raised its full year EPS guidance, which came in above expectations. Zooming out, we think this was a solid quarter that shareholders will appreciate. The stock is up 1.5% after reporting and currently trades at $19.4 per share.

Is Now The Time?

Macy's may have had a good quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We cheer for all companies serving consumers, but in the case of Macy's, we'll be cheering from the sidelines. Its revenue has declined over the last five years, and analysts expect growth to deteriorate from here. And while its popular brand makes consumers more likely to purchase its products, the downside is its relatively low ROIC suggests it has struggled to grow profits historically. On top of that, its shrinking same-store sales suggests it'll need to change its strategy to succeed.

Macy's price-to-earnings ratio based on the next 12 months is 7.2x. While we've no doubt one can find things to like about Macy's, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $20.44 per share right before these results (compared to the current share price of $19.40).

To get the best start with StockStory, check out our most recent stock picks, and then sign up to our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.