Macy's Is Out Of The Hole But Has Nowhere To Go
Summary
- Macy's shares are back to 2019 levels but 2021 estimates suggest 18% lower revenue, 37% lower EBITDA and 50% lower earnings.
- Q1 of 2021 will be loss-making, with 75% of EBITDA coming in the second half of the year.
- Adjusted diluted EPS Between $0.40 and $0.90.
- Up to 38% downside risk.
Investment Thesis
Macy's (NYSE:M) shares have reached the pre-pandemic (2019) level, but Macy’s is just a shadow of its former self. The company’s estimates for 2021 suggest 18% lower revenue, 37% lower EBITDA and 50% lower earnings compared to 2019. Shares of the firm cannot be backed up by anywhere near the fundamentals of 2019. With a plan in place for debt reduction and transformation at the expense of dividends and buybacks, it might be heading for a 38% price correction.
Share Price
The pandemic has hit hard Macy’s stock. The vast majority of the firm’s stores are in huge malls which were among the very first victims by the measures the U.S government had to take, to curb the spread of the virus. This decision cost a lot to Macy’s and many of its peers and led to the massive share drop. Lured by the uncertainty around the future of retail and filings for bankruptcy of names such as J.C. Penney, J.Crew and Neiman Marcus, funds did short the stock anticipating a similar outcome. On the 30th of June 2020, the company had as much as 158.6 million shares short or approximately 51.6% of the float.
The recent stock price surge has short squeezed a number of funds and forced many of them to cover their losses, potentially boosting the stock price further.
Source: M Short Interest Ratio (Macy's) | MarketBeat
Despite the odds being against the firm, Macy’s stock has made an impressive comeback. From lows as $4.38 almost a year ago, the stock is now in the $15 range. Some of its peers and closest rivals such as Nordstrom (JWN) and Kohl’s (KSS) also did make an impressive return, showing a positive market sentiment towards the recovery of this sector.
Source: Seekingalpha.com
With 15% of the U.S. population already received the first dose of the vaccine and 7.5% of the population fully vaccinated, the USA is ranked 7th among the countries with one dose and 3rd among the countries with the highest percentage of fully vaccinated people. This roll-out of the vaccines has brought hopes for a quick recovery but it may take longer than CEOs think, here is why.
Fourth Quarter and 2021 Guidance
Macy's fourth quarter of 2020 came as a surprise to the market. Sales were down 17% year over year, but higher quarter-to-quarter revenue might have suggested that the business is recovering from the coronavirus. The news from the online side of the business was good too, where sales did rose 21% year over year and represented 44% of total revenue for Q4. Adjusted earnings were $0.80 per share, beating market expectations for a profit of just $0.12 a share.
The firm launched the Polaris transformation program a year ago. To accelerate the company’s focus toward digital and omnichannel sales. A transition that has slowly been happening in the retail sector for a long time and may play a key role in the recovery of this sector.
Despite the share price recovery, the guidance given does not come close to what the firm was achieving in 2019. Macy’s predicts 18% lower revenue, 37% lower EBITDA and 50% lower earnings compared to 2019 with 75% of EBITDA weighted towards the second half of the year.
The firm has already mentioned (on page 12) that Q1 of 2021 will be loss-making. With 75% of EBITDA coming in the second half of the year, I assume that Q2 will be loss-making too.
Source: PowerPoint Presentation (equisolve.net)
On page 25 (slide 26) of the investor presentation, Macy’s has shown its value-enhancing plan. Management will prioritize capital expenditure and de-leveraging the balance sheet as a source of value creation. Furthermore, back in February 2020 just before COVID-19 to sweep the whole world, Macy’s had already seen the need for reshaping and had spoken about getting rid of the underperforming stores. Being in midst of a pandemic, such a decision makes could help with profits but most certainly will hurt revenue growth.
Source: PowerPoint Presentation (equisolve.net)
Some of the targets on the focus include a debt-to-EBITDA ratio lower than 3 and an interest cover ratio of 6.5 times. The company has suspended any dividends and stock buybacks for now and intend to reinstate them as soon as the market environment improves.
Valuation
This year is not going to be Macy’s year from a financial state point of view. But was there any other that has been? 
From a technical point of view, the share price has been on a downward trend, as well as the earnings, excluding minor boosts from asset sale gains and tax reforms. Malls have been dying breed even before the pandemic had struck with online shopping becoming more popular among younger generations. Macy’s progress towards online sales have been impressive post-COVID-19, but with the firm still heavy in brick-and-mortar, the shift might be far away.
On the 23rd of February, the day Macy’s released Q4 and end of the year earnings, shares plummeted as low as 10% by the 16th minute. This further fuels my scepticism about the current market price and the chance that it might have been propelled back up by covering up short-sellers and retail traders. What makes this price drop interesting is that it happened despite the surprisingly positive earnings. In my opinion, it represented the basic instinct of investors.
Source: IG.com
Furthermore, Macy’s and the retail industry have always had a good correlation with fundamentals. The sector generally trades in the 12-15 P/E ratio range. However, since 2018 due to declining margins and limited revenue growth, the firm went in the 6-7 P/E ratio range. A multiple dedicated for companies with flat or negative revenue growth and declining profits.
Based on the financial guidance provided for 2021, with top earnings expected at $0.90 a share, even at a 12-15 P/E ratio the firm should trade at $10.8- $13.5 range. But since Macy’s traded at 6-7 times earnings for a few years before the pandemic, my view on the stock broadly aligns with the market consensus.
At its current price, the company has a 38% downside risk according to the market consensus.
Source: M Price Target, Analyst Ratings and Predictions (Macy's) (marketbeat.com)
Conclusion
From what I see based on the share price, the market is misinterpreting the revenue growth and adding it up towards the valuation. Meanwhile, the business is just trying to take back what they lost. This makes people investing in Macy's pay 2 times more on an earnings per share basis compared to 2019 and will not receive a dividend. As time passes revenue growth may go flat again proving a long-term trend that has been ongoing in retail. This will probably take the company back to the 6-7 P/E ratio zone.
I expect shares to drop with the approach of Q1 and Q2 results.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (20)
It had its fair share of trouble before 2020.
It's good you looked back to look to the future, but you need to look a bit further out to 2022, as this pandemic is still going to have an impact on this years' results. Macy's, Kohl's and Nordstrom have all offered what are likely conservative EBITDA forecasts for this coming fiscal year on their 4Q 2020 earnings reports. They are below 2019 results, (which weren't great), as a % of 2019 EBITDA; Macy's 68%, Kohl's 81%, Nordstrom 84%. Macy's is a trailer because it depends fair amount on tourists to its Flagship stores in NYC, SF and Chicago. Right now that component has only one way to go and that is up and will have a positive impact on the back half of 2021 and 2022. That said, based on the outlooks, this year's forward EBITDA multiples are - Macy's 5.1x , Kohl's 5.0x, Nordstrom 7.0x. (Nordstrom and other higher-end retailers, for as long as I remember, always trade at a premium for no reason other than the PM's are more likely to frequent them.). In addition, FCF estimates are - Macy's $750 mill , Kohl's $950 mill., Nordstrom $600 mill. One last thought - all of these stores as part of a Mall have independent entrances to the parking lots. I suggest readers look at the 8K and 10K's of these retailers for more details of their digital platform and actual results.
Economy reopening + latest round of stimulus both huge.
As a long term investment, I would probably put money in Macy's. However, in terms of the current price, I don't think it is correct for the moment.I believe that the $12-$13 range would be more appropriate at this point. and this would probably be until Q2, then I expect until Q4 shares to be in the $15-$17.All I was trying to say is that I don't see it going up in the next 5-6 months.