According to a report from Fitch Ratings:
“Department stores are the most pressured category in domestic retail,” said Monica Aggarwal, Senior Director, Fitch Ratings.
Fitch estimates that an industry growth rate of 2% could be achieved by relatively flat to modest comps growth at the store level and mid- to high-teens growth from online sales for retailers that currently generate 10% of their revenue from online. Online growth of 15%-20% would translate into a 150 bps-200 bps contribution to overall comps.”
I had covered J. C. Penny (JCP, Financial) and Kohl’s (KSS, Financial) here and here, and in this piece I will be taking a look at Macy’s (M, Financial). After a great run of two consecutive earnings beat, Macy’s hit a road bump in its first-quarter fiscal 2015, which the company attributed to the unfavorable weather conditions, West Coast port dispute and muted spending by international tourists. Let’s take a look at the results.
First quarter numbers
International tourists contribute approximately 5% to the company’s revenue. As a result of strong dollar, the spending from international tourists saw double-digits decline and hit the comps negatively by about one full percentage point. In addition, the port strike on the west coast and unseasonably cold start to the quarter added to the woes.
As a result comparable-store sales decreased 0.7% year-over-year in contrast to comps growth registered both at J. C. Penny and Kohl’s. Hence, the company generated revenues of $6,232 million, representing a 0.7% year-over-year decline, and missed consensus estimate by around $80 million.
As a result of declining sales and contraction of gross profit margin, operating income declined 7.7% year-over-year to $409 million. Earnings declined 6.6% year-over-year and came in at $0.57 per share, clearly missing the consensus estimates.
Macy’s exited the quarter with cash and cash equivalents of $1,509 million, long-term debt of $7,260 million, and shareholders’ equity of $5,207 million.
Fixing the problem
Macy’s is planning to boost capital spending by $100 million in quest for growth. This will go toward development of new store formats, increase integration of its stores with online operations, and expand Macy’s and Bloomingdale’s nameplates outside the U.S.
In fiscal 2017, the company will be opening new stores, including new Macy’s and Bloomingdale’s in Miami, FL, and a new Bloomingdale’s in San Jose, CA. In addition, Macy’s plans to open new Macy’s and Bloomingdale’s outlets in Abu Dhabi in 2018, under license agreements with Al Tayer Group. In all, it plans to open 32 new stores by 2018.
Another initiative in the cards is the loyalty program “Plenti”, which was launched on May 4, 2015. This is the first U.S. loyalty coalition involving major U.S. brands. In the first week itself, the company enrolled more than 2 million customers, well ahead of expectations. This is in addition to the week-long discount sales on Bloomingdales, which is held four times a year and offers 20%-to-25% sale.
Another growth initiative is the integration of Bluemercury's growing e-commerce division with its excellent omni-channel capabilities. During the earnings call, Karen M. Hoguet, Chief Financial Officer said:
"We are also developing plans to maximize their e-commerce business utilizing our omnichannel capabilities, and we expect to open approximately five shops within Macy's stores over the next nine months, with a few opening this fall so we can start testing various concepts. The Bluemercury approach to the Beauty category is opening our eyes to new strategies and tactics, which could actually help us grow our overall beauty business beyond their own operation."
However, all these initiatives together will take time to start showing results, and fiscal 2015 is said to be the transition year for the company.
Investor friendly
Management is investor friendly and has been regularly making healthy cash returns to investors via dividends or share repurchase activity. In the reported quarter, Macy’s bought back around 5.9 million shares for about $385 million. Since August 2011, the company has bought back around 123.3 million shares for approximately $5.7 billion through May 2, 2015. Going forward, the company has enhanced the share buyback program by $1.5 billion, bringing the total authorization to approximately $2.1 billion. The share buyback will add to EPS growth and return on equity, or ROE, going forward.
During the quarter under review, the company increased its quarterly dividend to $0.36 a share from 31.25 cents currently.
Wrapping up
For fiscal 2015, Macy’s expects comps growth of approximately 2% on an owned plus licensed basis and is in line with what Fitch sees as reasonable figure to maintain market share. Total sales are expected to increase 1% year over year. The company is working on multi-pronged strategy to drive long-term growth.
Also, the company is investor friendly and has been returning cash at regular intervals. At a forward P/E of 13.1 it is a great stock for value investors. For the next five years, analysts expect a CAGR of 9.18%. Hence, despite the blip, this is a stock that warrants a buy for long-term.
