Interactive Brokers - Macy's Could See Bigger Sales Boost From Black Friday

|
Includes: AMC, AMZN, JCP, M, TGT, WMT, XLY
by: Interactive Brokers
Summary

As iconic U.S.-based department store Macy’s gets set to release its third-quarter of 2018 earnings results, the global retail sector has been preparing for year-end holiday sales.

Given some optimism about Black Friday, the company could well meet its upwardly revised sales guidance.

As an omnichannel retailer, Macy's may see a boost across both its traditional stores as well as through its digital platforms.

As iconic U.S.-based department store Macy's (NYSE:M) gets set to release its third-quarter of 2018 earnings results, the global retail sector has been preparing for year-end holiday sales.

Consumers generally continue to take out their wallets, despite the myriad of event risks looming in the background, including trade-related tensions, Brexit negotiations, as well as the impact on the cost of crude from U.S.-imposed sanctions on Iranian oil supplies.

Indeed, personal consumption expenditures (PCE) have shown consistent strength throughout Q2'18-Q3'18, amid higher household incomes and discretionary spending.

Against this backdrop, Macy's, among other retailers, is gearing up to offer Black Friday and Cyber Week specials beginning with a preview on Thursday, November 15 and carrying through Cyber Week, which runs from Sunday, November 25 to Wednesday, November 28.

Given some optimism about Black Friday, the department store could well meet its upwardly revised sales guidance.

According to a recent McKinsey & Co. Periscope survey conducted by analysts Yagmur Anis, Brian Elliott, and Christian Koestler, shoppers appear willing to shell out more cash during Black Friday in 2018 - mainly for discounted goods, unique one-off promotions, and Christmas gifts.

Anis, Elliott, and Koestler noted that 16% of their 1,001 U.S. respondents expect to spend US$1,000 or more - up from 9% in 2017 - with a "sizable" 22% budgeting US$500 for Black Friday purchases.

As an omnichannel retailer, Macy's may see a boost across both its traditional stores as well as through its digital platforms.

According to Periscope, 54% of their U.S. sample "still favors offline shopping when it comes to selecting new clothes." However, the survey also showed that shoppers across every age category were most likely to "plump" for online purchases "as the ideal antidote to escaping the chaos they say they have encountered when venturing to stores to shop during Black Friday events."

Overall, Periscope added that with an average of 54% of shoppers in all surveyed markets saying they are planning to shop more online this Black Friday compared with previous years, "it is clear that digital is becoming increasingly dominant as a channel."

In Q2'18, Macy's CEO Jeff Gennette said it was "encouraging to see the continued strengthening of our brick and mortar business where we saw trend improvements across the portfolio, led by our Growth50 stores. The combination of healthy stores, robust e-commerce and a great mobile experience is Macy's recipe for success." He added that the company's "strategic initiatives are gaining traction. They contributed to our first half results and will continue to have a positive impact on our performance in the back half of the year."

Increased Black Friday sales in 2018 would certainly further Macy's top-line, after having performed well in Q2'18 in categories that included fine jewelry, fragrances, kids, men's, furniture, and luggage.

Gimme Credit analyst Carol Levenson said that several of Macy's growth initiatives are "centered on digital, including an improved mobile app, a growing online assortment directly from vendors, enhanced online delivery and fulfillment options, and even the rebooted loyalty program with its deals on shipping."

Against this backdrop, Macy's had lifted its earnings and sales guidance for fiscal 2018.

In its Q2'18 financial report, the company said it expects to earn between US$3.95-4.15 ex-items, with total revenues anticipated to range from flat to a 0.7% increase.

Aim to slash debt

In the meantime, the Cincinnati-headquartered company, which operates close to 700 department stores, including Bloomingdale's, has been shoring up its balance sheet and reducing debt.

Levenson said in Q2'18, the retailer was "diligent" about cutting its debt, retiring US$344m of high coupon debt spread across eight bond issues in the quarter via open market purchases. However, she added that because free cash flow was negative, this was done by depleting cash on hand, sending net debt higher by US$117m. Rent-adjusted debt/EBITDAR calculated according to management's target improved meaningfully year-over-year to 2.6x.

While certain of the company's bonds have improved through Q2'18-Q3'18, some yields have been steadily rising since September, amid a rising U.S. interest rate environment.

The yield on Macy's 6.9% notes due April 2029, for example, has risen roughly 50bps since the end of August, while the yield on the 10-year U.S. Treasury note has increased around 32bps over the same period.

Overall, the market's perception of the department store chain's creditworthiness has been positive, with the spread on its five-year credit default swaps (CDS) last quoted tighter by more than 2.5bps on Wednesday to a little more than 156.6bps, after having narrowed by more than 1bp over the past three months.

The company's stock has risen over 138.5% from its 52-week low of US$17.53 set in early November 2017 to its peak when it released its Q2'18 results. Following the earnings released in mid-August, Macy's shares had plunged roughly 16%. Its stock was last quoted at around US$36.30, down 2% intraday Wednesday and off 13.2% from its high in August.

In Q2'18, while the company experienced its third consecutive quarter of comparable sales growth, it disappointed market expectations for a stronger showing.

Overall, Macy's net sales fell 1.1% year-on-year to total close to US$5.6bn; however, for H1'18, they rose 1.1% from the prior year to US$11.11bn.

The firm said that due to the 53-week calendar in fiscal 2017, there had been some timing adjustments in the company's typical promotional calendar, including the shift in its spring Friends & Family promotion. This shift had caused a positive impact in Q1'18 of around 250bps while spurring a negative impact of about 240bps in Q2.

Macy's is set to unveil its Q3'18 earnings results Wednesday, November 14, with the market generally anticipating US$0.14 EPS compared to actual earnings of US$0.23 in the same year-ago quarter.

Note: This material was originally published on IBKR Traders' Insight on November 7, 2018.

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: I am receiving compensation from my employer to produce this material.