Macy’s: department store operator faces uphill climb

Investors were in an ebullient mood on Thursday after Macy’s delivered better than expected results. They should not give the US department store operator too much credit. The bar was low. The company warned in January that holiday-quarter sales would come in on the lighter side.

Macy’s, which also owns Bloomingdale’s, started 2022 on strong footing as post-coronavirus lockdown “revenge spending” lifted sales.

These gains proved ephemeral. Persistent inflation is squeezing the middle-income consumers that Macy’s caters to. This was reflected in a 3.3 per cent drop in like-for-like sales during the fourth quarter. Measures of profitability — including net income and gross margins — all declined compared to last year. Even digital sales, one of the few bright spots for Macy’s, fell as a percentage of net sales.

The outlook for 2023 is not much better. Comparable sales could fall by as much as 4 per cent while adjusted diluted earnings per share are expected to be 8-18 per cent lower.

That is hardly stellar. But it is not as bad as analysts feared. The company does have some things going for it. Inventory is down 4 per cent year on year. That should allow it to reduce its markdowns. Its balance sheet is in better shape following a refinancing. The company, which generated $1.6bn in cash flow from operations last year, does not have any material debt maturing until 2027.

Macy’s shares, down 15 per cent over the past year, trade on a forward price/earnings ratio of just six times. That is a substantial discount to the S&P 500 retail index. To narrow the gap, the store chain needs to do better than just limp along. It must grow sales again. Its turnround efforts, which include store closures, investments in private brands and ecommerce, will need to bear more fruit before the stock becomes fashionable again.