Macy's Inc.'s (M, Financial) fourth-quarter results were better than expected amidst a rather challenging retail landscape for brick-and-mortar businesses. Not surprisingly, the uptrend in the company's digital sales acted as the key catalyst behind the strong performance with online revenue up almost 21% on a year-over-year basis.
Additionally, the company's Polaris strategy, which was designed to allow significant flexibility in operations, acted as an important catalyst. Macy's has been increasingly taking its stores off-mall and plans to uphold that trend in 2021, which is a change in terms of its brand positioning. It will certainly be interesting to see the company's recovery story in 2021.
Recent financial performance
Macy's had a weak 2020 given its heavy concentration on the brick-and-mortar business, but its revenue has shown some recovery over the past several quarters, which is why the stock has witnessed a runup.
For the fiscal fourth-quarter 2021, the company reported a top line of $7.04 billion, which implied a 17.95% drop as compared to the $8.58 billion in sales reported in the corresponding quarter of 2020. Luckily, Wall Street's expectations were low and the company beat the analyst consensus estimate of $6.48 billion.
Its revenue translated into a gross margin of 36.08% and an operating margin of 8.40%, which was lower than in the prior-year quarter. Macy's reported net income of $160 million and adjusted earnings of 80 cents per share, which was well above the analyst consensus estimate of 11 cents. The company managed to generate $405 million in operating cash flow, which is a major green flag. Despite the Covid-19 headwinds, the company was able to generate positive free cash flow and ended the year with close to $1.7 billion in cash on hand.
Strong digital performance
In 2020, the retail industry witnessed an explosion in online shopping given the constraints imposed by to the Covid-19 pandemic, which is why Macy's witnessed significant growth in digital sales. The management rapidly adjusted its merchandise mix given the consumers' increased preference toward categories like home, casual apparel, jewelry and fragrance.
The company gained nearly 7 million new customers in the fourth quarter alone, many of them under the 40 years bracket. Notably, customers have been responding well toward the company's expanded omnichannel offerings, including curbside, store pickup and same-day delivery. Nearly 25% of online sales were generated from the stores using these services. Moreover, Macy's is constantly improving its mobile and website features, wherein its brand digital platform saw double-digit increases in site visits and conversion rates. This growth partially offset the overall decline in in-store sales as mall traffic continued to suffer due to the pandemic-induced disruptions.
The Polaris strategy and other growth efforts
The three-year Polaris strategy introduced by Macy's has played a role in adapting to customers' needs and to new forces in the external environment. The strategy focuses on strengthening customer relationships, expanding assortments, developing digital growth, optimizing store portfolio and reducing costs. It is interesting to note that Macy's shifted a large proportion of its current and future capital to digital, supply chain and technology platforms to better integrate its digital and physical assets in order to deliver the most relevant shopping experiences.
Management believes these shifts will be able to generate approximately $10 billion in sales from the digital channels by 2023. Apart from this, the company's Star Rewards Loyalty program, which was initiated in 2018, has been aiding excellent customer engagement with a 45% increase in Bronze tier memberships over the entire year. Moreover, the credit card business performed well during the pandemic and its revenue accounted for a substantial percentage of the company's overall profitability.
Overall, Macy's appears to be well poised for 2021 with its cost cuts, digital sales growth and improved inventory management.
Final thoughts
As we can see in the chart above, Macy's stock has made an impressive comeback and has more than doubled in the last six months, owing to the growing optimism around vaccine rollouts and the company's rebuilding efforts. The retailer's progress toward online sales has been impressive, but since the company is still heavily positioned in the brick-and-mortar space, it will face its fair share of challenges at least until the second half of 2021.
The company is currently trading at an enterprise value-to-revenue multiple of 0.66, which is very reasonable within the retail sector, especially given its strong margin profile. Its price-sales ratio is even lower at around 0.29. Macy's cash generation has been strong despite the Covid-19 challenges and could be a good turnaround story. I believe the stock certainly deserves a place on investors' watch lists.
Disclosure: No positions.
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