Which Macys stores will close in 2019
Stock analysis of the week: Macy's
Macy's is still fighting to stay relevant to consumers. Consumers have many choices and the no-moat department store operator is suffering. We forecast that the coronavirus crisis will cause sales to decline 30% in 2020 and a high operating loss. Unfortunately, the more than 600 full-range branches and the sales area of more than 10 million square meters limit the company's development opportunities. While Macy's has stores in most of the top US malls, the group also has numerous stores in weaker locations or malls, many of which will not recover from the closings and economic fallout from the pandemic.
Macy's doesn't need its huge retail space as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think the Covid crisis could accelerate this trend. Macy's management has admitted that two-thirds of its customers also buy from discounters, and accordingly, the house relies on discounts and coupons. We forecast that Macy's operating margins (excluding property gains and expenses) will average just 4.8% in 2021-29. Additionally, we forecast Macy's sales to be below $ 25 billion in 2019 due to store closings and a lack of consistent organic growth.
The reaction to the market changes is insufficient. Macy's restructuring plan (Polaris) provides for the conversion of branches, branch closings, an expansion of e-commerce activities and the expansion of the backstage concept. While the initiatives are plausible on their own, we don't expect them to attract large numbers of new customers. Proof of this is that Macy's sales have been weak in recent years, even though the e-commerce space has grown.
We think Macy's was simply too slow to respond to the threats posed by the competition and that it lacks the efficiency of fast fashion, the customer service of luxury retailers, or the low prices of discounters. While Backstage (more than 200 locations within Macy's stores) offers an off-price presence, we see it mostly as defensive, as discounters like TJX, Nordstrom Rack, Ross and Burlington have already built a base of freestanding stores . We don't think Macy's can regain the sales lost to these and other retailers.
Moat and Moat rating (updated on December 8, 2020)
Macy's has a “no-moat” rating. We do not believe the company has built a sustainable intangible asset or cost-based advantage over competitors. While the Macy's and Bloomingdale's brands are well known in the United States, intense competition from e-commerce and discount stores has reduced malls' traffic and eroded profit margins for many products sold in department stores.
Macy's has closed more than 130 stores in response. Macy's total revenue peaked at $ 28 billion in 2014 and then declined to less than $ 26 billion in 2019. Macy's average annual operating margins (excluding real estate gains and expenses) were also weak, in the last four Years at only 5.6%.
As evidence of the company's inability to gain a competitive advantage, Macy's adjusted ROI, including goodwill, fell from an average of 14% between 2010 and 2015 to 11% between 2016 and 2019. We forecast that Macy's will post a high loss and negative ROIC in 2020 due to the pandemic, and we do not expect the company to generate any economic profit in the next decade.
We believe the lack of an intangible asset based moat at Macy's is reflected by the fact that the company has downsized its stores and plans to further reduce its store base and retail space. Macy's closed at least 124 stores between 2015 and 2018, closed about 30 more stores in late 2019, and will close about 125 more stores over the next three years. Macy's gross floor area has decreased from 150 million to about 110 million in the past five years and will continue to decline. Macy's still operates more than 600 Bloomingdale's and Macy's stores, many of which are in mid-range malls.
Macy's operates approximately 200 stores in sought-after Class A malls (sales per square foot over $ 500). Hundreds of stores are also maintained in Class B and C malls (malls with sales per square foot less than $ 500 and $ 300, respectively). In contrast, competitor Nordstrom operates around 100 full-price stores, 95% of which are in class A shopping centers. The US has 2 to 8 times as much retail space as other developed nations by some estimates, and we believe the COVID-19 crisis will accelerate the downsizing that is needed. We see the overly large area of Macy's as a competitive disadvantage.
Macy's is a well-known brand but has missed major consumer trends, which supports our thesis that the company lacks a moat based on intangible brand equity. The company served more than 40 million customers last year and has approximately 30 million members in its loyalty program. In 2017, Macy's revealed that only 9% of its customers generate 46% of sales with an average of 18 visits per year. Macy's also revealed that 40% of these top customers descend to lower segments annually, suggesting that its key customers aren't particularly loyal. Additionally, Macy's statistics showed that the bottom 40% of its customers visit less than three times a year and only account for 12% of sales. These numbers suggest that while Macy's is a well-known brand, it is not a particularly strong brand.
Macy's is building an off-price business within its full-price stores to compete with the discounters. But the competitors are not sleeping. The fashion discounter TJX and Ross Stores, for example, have roughly doubled their sales in the last ten years. Also, thousands of fashion outlet stores have opened in recent years. Some of these stores were opened by direct competitors of Macy's. Nordstrom, for example, has expanded its chain of rack outlet stores from 50 in 2007 to around 250 today. Competition from international fast fashion companies such as H&M (No-Moat) and Inditex (parent company of Zara), both of which have expanded rapidly in the US since 2010, has also increased. H&M operates more than 550 stores in the US, up from 208 stores at the end of 2010. Zara recently opened its 100th store in the US, compared to 45 stores at the end of 2012.
Macy's sizable e-commerce business could also pull revenue from its physical stores. According to eMarketer, Macy's is the 10th largest e-commerce retailer in the US, with online sales of more than $ 6 billion in 2019. The company has invested heavily in e-commerce, with an emphasis on mobile, same-day delivery in large markets and buy online, pick-up in store. However, Macy's is reporting poor sales despite the growth in its e-commerce business, suggesting that e-commerce is cannibalizing in-store sales. Macy's reported negative sales figures in 2015 (minus 3.1%), 2016 (minus 3.6%), 2017 (minus 2.2%) and 2019 (minus 0.8%), although the company has a double-digit e-commerce Growth boasted. We don't think Macy's e-commerce adds to the strength of its brand as we don't see it as a revenue driver.
Aside from the intangible assets, we do not believe that any other sources for a moat can be applied to Macy’s business models. The company has no production cost advantage as it sources its clothing from many of the same manufacturers as other fashion retailers. We don't think it has the power to negotiate lower prices with manufacturers. Macy's also does not have an efficient scale as its distribution system is similar to that of its competitors. There is no network effect in clothing retail and conversion costs are non-existent. While the Macy's brand is well known in the US, we don't believe it will contribute to an economic moat and we believe the company will continue to be challenged by the intense competitive landscape.
Fair value and profit drivers (updated on October 21, 2020)
We're sticking to our fair value estimate for Macy's of $ 16.30, which implies an EV / EBITDA for fiscal 2021 of roughly 6x. Due to shop closings and the economic effects of the COVID-19 crisis, we expect a 30% decline in sales for 2020. We also expect an operating loss (excluding special charges and real estate gains) of approximately $ 1.3 billion. Including unusual items, we forecast an operating loss of approximately $ 4.7 billion for Macy's this year. Overall, our forecast for adjusted EPS 2020 is minus $ 2.89. We also predict that capex spending in 2020 will decrease nearly 60% year over year to $ 483 million as Macy's curtails spending to keep cash together.
Sales and earnings are likely to rebound this year, but we don't anticipate any return to previous sales levels, in part due to expected permanent store closures. We expect an EPS of $ 0.77 with sales growth of 16% in 2021.
In the long term, we are not confident that Macy's growth plans, such as For example, building backstage stores within Macy's branches, improving merchandising, a new loyalty program and digital opportunities will overcome the weakness of retail in malls. While we recognize that Macy's has a large customer base and millions of credit card holders (nearly 50% of transactions are made with their own credit cards), there is evidence that many Macy's customers make infrequent purchases. We don't think Macy's can win market share as online and offline competition will intensify despite some branch closings from rivals.
After rising sharply due to a drop in sales during the pandemic, we expect Macy's Selling, Administrative and Overhead Expenses as a percentage of sales to stay roughly at around 35% levels over recent years in 2022-29 as the company does must invest heavily in marketing, e-commerce and other initiatives in order to remain competitive.
Macy's gross margins are likely to stabilize at 40% -41% overall, which is in line with recent years. Without taking the credit card business into account, we forecast long-term gross margins of around 38%. Macy's could maintain gross margins as it increases sales of its own and exclusive brands.
Risk and uncertainty (updated on December 8, 2020)
We assign Macy's an uncertainty rating of “high” because the company had to contend with high levels of debt and erratic results before the COVID-19 crisis. Its operating income (excluding expenses) declined more than $ 1.5 billion between 2014 and 2019 (to $ 1.2 billion from $ 2.8 billion) due to store closures, declining sales, and increased costs. Macy's reported negative same-store sales in 2015-17 and 2019. Due to COVID-19, we forecast a massive 30% drop in sales in 2020. In the meantime, competition from traditional retailers (Kohl's, Walmart), E -Commerce (Amazon) and discount stores (Ross, TJ Maxx) fierce. While Macy's is investing in its remodel to stay relevant, there's little evidence that these efforts can attract new customers or encourage existing customers to spend more. The backstage branches could allow Macy's to be more competitive with the discounters, but they are mostly located in Macy's branches and are therefore dependent on customer traffic.
Macy's, like other clothing and homeware retailers, is cyclical. In the last recession, total sales decreased from $ 26.3 billion in 2007 to $ 23.5 billion in 2009. Retail sales declined 4.6% in 2008 and another 5.3% in 2009. Due to the COVID-19 store closures and the recession, we forecast a 28% decrease in Macy's like-for-like sales in 2020. While Macy's sells clothing and accessories in all price ranges, including high-priced luxury items at Bloomingdale's, the company does not have a large off- Price fashion trade.
Macy's could suffer from a re-flare of the trade war with China or if the coronavirus affects imports from China to the US. Apparel accounts for about 70% -80% of Macy's sales. Since China accounts for 35% of global apparel exports, according to the World Trade Organization, trade barriers (legal or logistical) between the US and China would affect Macy's private label and third-party business. Tariffs on imports from China could also increase Macy's costs.
The price of Macy's stock, which is listed on the NYSE, was $ 18.18 on January 27, 2021 shortly after the IPO. This puts the paper above our fair value estimate of USD 16.30.
The analysis in this article is based on our professional investor tool. For more information on Morningstar Direct, please visit here.
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