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Macy's: The Ultimate Show Me Story

Mar. 05, 2018 9:22 AM ETMacy's, Inc. (M)5 Comments
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  • Macy's reported a better-than-expected 4Q2017, reporting positive owned store comps for the first time since 4Q2014.
  • Asset sales and reduced SG&A allowed management to reduce leverage.
  • FY2018 guidance provided support to shares, but relatively tougher 2H2018 comps require the company to execute flawlessly during the 1H.
  • Upside limited until management can prove 4Q2017 was not an anomaly - next catalyst 1Q2018 earnings report.

Given the secular headwinds facing mall-based retailers, expectations for Macy's (NYSE:M) over the past few years have continued to erode. In response to the secular decline in mall traffic, M's management has pursued a multi-faceted turnaround strategy which it has dubbed its "North Star Strategy". While there has been a lot of doubt in the market related to the ability of management to execute against the challenging secular backdrop, the company seems to be signaling it believes this most recent quarter was the inflection point.

"In 2017, we tested and iterated a number of merchandising and strategic initiatives as part of our North Star Strategy. These initiatives contributed to our fourth quarter performance, and in 2018 we are ready to scale as well as test additional revenue-driving initiatives. We are also encouraged by customer response to our new Star Rewards loyalty program," (Source)

In addition to understanding the fundamental performance of M and what drove the earnings beat, I find understanding sell-side analysts' reactions and, in turn, the recommendations they are passing along to their clients, as important in determining whether the stock will continue running or if the majority of upside has been captured by others.

Source: Huffington Post

Earnings Review

For the 4Q2017, the company reported same-store comps (owned stores) of +1.3% vs. consensus of 0.4%, which was the first positive owned store comp since 2014. In addition to reporting better-than-expected comps, the company also posted better-than-expected gross margins of 38.2% (vs. 37.9% consensus), SG&A of 26.2% (vs. 27.4% from a year ago), and operating margins of 16.1% (vs. 15.6%). In addition, the company reported inventories of $5.18B, down 4.1% YoY, in an environment which it also saw sales grow 1.8%, indicating an improvement in its merchandising strategy.

Following the report, the stock has traded up ~10.5%, despite the broader "risk-off" sentiment that

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Swim upstream.

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