Macy’s Outperformed Low Expectations in Q4

No-moat Macy’s M reported a same-store sales decline of 17% in the fourth quarter of 2020, slightly outpacing our forecast of a 21% drop. We expect to increase our per share fair value estimate of $16.30 by a mid-single-digit percentage and view shares as slightly undervalued.

Macy’s net sales in the quarter dropped 19%, bettering our forecast of a 22% decline, as e-commerce jumped 21% to $3 billion (about 44% of sales). The firm cited strength in home (up 14%), jewelry, and fragrances, but apparel sales plummeted 33%. We expect apparel sales to remain slow as formal events and normal work patterns have yet to resume.

Macy’s gross margin of 33.7% came in 120 basis points better than our forecast of 32.5% due to greater sales leverage but was still 310 basis points below that of the prior year. The retailer, like many others, was hit with delivery surcharges in the quarter. We think the impact of e-commerce fulfillment costs on Macy’s will abate as sales rebound from the pandemic and its investments in digital capabilities take greater effect. The firm did exhibit solid cost control as operating expenses declined 18% from last year and were 30% of sales versus our 33% estimate. The firm closed 2020 with run-rate annual cost savings of about $900 million (as it had previously forecast under the Polaris plan). Macy’s adjusted EPS of $0.80 in the quarter came in well above our $0.26 estimate.

Macy’s released 2021 guidance of adjusted EPS of $0.40-$0.90 on sales of $19.75 billion-$20.75 billion, roughly in line with our prior forecast of EPS of $0.77 on $19.87 billion in sales. However, the near-term outlook remains murky due to the ongoing effects of the virus. We do think conditions for Macy’s and other apparel retailers will improve in the second half of the year.

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