2023-06-20 18:14:49 ET
Summary
- Macy's, Inc. is still set to earn ~$3 per share this FY, yet the stock trades at recent lows.
- The department store retailer yields 4.2% without even paying an excessive dividend.
- The stock is cheap at 5x depressed FY23 EPS targets.
The apparel sector has faced a brutal year, with excess inventories and covid pull forwards heading into a potential recession in the U.S. Macy's, Inc. ( M ) was one of the last retailers to slash numbers, but the department store wasn't able to overcome the dire sector outlook. Ultimately, my investment thesis remains ultra Bullish on the stock heading into a likely tough holiday period before the retailer can start FY25 with a more normal operating period.
Tough Period Won't Last
Whether due to the banking crisis or macro issues, Macy's hit a tough spell in the last quarter. The department store retailer had to cut guidance for the year due to macro issues, with sales slumping during the March/April period.
The key is understanding these are no longer normal numbers. Macy's guided to FY23 EPS of $2.70 to $3.20 for a massive cut from prior expectations for a nearly $4 EPS.
On the FQ1'23 earnings call , Macy's made sure investors understood the lowered guidance was due to the macro issues, not operational issues at the retailer as follows:
We have planned our business for the remainder of the year, assuming mid-March through April macro headwinds continue and potentially worsen, and we have taken decisive actions in the second quarter and the back half of the year to ensure we are well positioned to compete.
In a near financial storm, with industry wide apparel issues combined with lowered consumer demand, Macy's still forecasts earning around a $3 EPS this year. The stock has amazingly fallen to $15 despite the knowledge of this being the worst case scenario.
The odd part is that Macy's already had FY23 EPS estimates pressured due to the promotional period in apparel. The company had already claimed on the FQ4'22 earnings report that the FY23 EPS guidance was pressured for the following reasons:
Macy’s, Inc. anticipates that the heightened level of uncertainty within the macroeconomic environment will continue in 2023. The company is taking a prudent approach to its outlook, which reflects the potential differences in the severity and duration of macroeconomic headwinds, offset by how the business can respond.
What doesn't make sense is analysts forecasting FY24 and FY25 EPS targets remain at these beaten-down levels. Analysts currently forecast EPS targets at ~$3 per share, while Macy's already has guided to an ~$4 EPS without the banking crisis and macro headwinds.
Return That Cash
Even under this worst-case scenario, Macy's should still earn nearly $3 per share for the year. The department store retailer pays a dividend of only $0.66, but the limited dividend payout still yields a strong 4.2% yield due to the cheap stock price.
Macy's would only have a payout ratio of a minimal 22% in order to offer shareholders this large yield. The department store retailer should be able to repurchase shares as well with excess capital.
The company isn't assuming any share repurchases as part of the EPS guidance, yet Macy's reduced the outstanding share count by 13.1 million shares, or 4.5%, in the last year. The biggest negative about the history of buybacks is the lack of purchases on weakness, though the company buying in the low $20s wasn't overly expensive.
The stock only trades at 5x depressed EPS targets, so this is when shareholders want the retailer to repurchase shares. The biggest problem is that the company has less cash flows at this point and always pulls back, like during 2020, due to depressed earnings from covid and recently with the cut earnings guidance.
Takeaway
The key investor takeaway is that the last 3 years have made results from the apparel retail sector very difficult to analyze. The normalized earnings for Macy's appear in the $4 range, but investors should be comforted that even in this very tough period the retailer is still earning the same $3 as in FY20 right before covid started.
Investors should use the stock trading at recent lows as an opportunity to load up. The department store retailer is full speed ahead, with growth in the Bluemercury brand and the outlet concepts, while the main Macy's brand has been re-imagined.
For further details see:
Macy's: Not So Dire