Macy's stock

Macy’s Shares Rise on Strong Digital Sales in Q2; Target Price $16 in Best-Case

Macy’s Inc, an American department store chain founded by Xavier Warren in 1929, reported a lower-than-anticipated decline in net sales but digital sales remained strong, growing 53% in the second quarter as shoppers purchased everything from the comfort of their homes amid COVID-19 pandemic, sending its shares up about 6% in pre-market trading on Wednesday.

The fashion retailer said its net sales slumped 35.8% to $3.56 billion but beat market expectations of $3.48 billion. However, digital sales remained strong, growing 53% over second-quarter of 2019. Digital sales penetrated at 54% of the total owned comparable sales.

Macy’s delivered a gross margin of 23.6%, an improvement of approximately 650 basis points from first quarter 2020 due to improved retail margins from the sale of clearance merchandise.

Macy’s reported a net loss of $431 million, or $1.39 per share, in Q2, worse than a profit of $86 million, or 28 cents per share, seen a year earlier.

The company said it withdrew its 2020 sales and earnings guidance and is not currently providing an updated outlook due to ongoing uncertainty as a result of the COVID-19 pandemic.

Macy’s shares rose about 6% to $7.41 in pre-market trading on Wednesday. However, the stock is down about 60% so far this year.

Executive comments

“We are encouraged by our second-quarter performance; however, we continue to approach the back half of the year conservatively. Our immediate priority is successfully executing Holiday 2020. We are also focused on laying the groundwork for 2021 and beyond,” said Jeff Gennette, chairman and chief executive officer of Macy’s, Inc.

We plan to invest in fashion, digital and omnichannel, work with agility, and galvanize the resources of the company to serve our customers and move the Macy’s, Inc. business forward,” Gennette added.

Macy’s stock forecast

Seven analysts forecast the average price in 12 months at $5.57 with a high forecast of $9.00 and a low forecast of $3.00. The average price target represents a -20.54% decrease from the last price of $7.01. From those seven analysts, none rated “Buy”, three rated “Hold” and four rated “Sell”, according to Tipranks.

Morgan Stanley gave a target price of $5 with a high of $16 under a bull-case scenario and $1 under the worst-case scenario. UBS downgraded to sell from neutral; lowered their target price to $3 from $6.

Other equity analysts also recently updated their stock outlook. Deutsche Bank raised their target price to $6 from $5, Jefferies upped their stock price forecast to $6 from $5, Cowen and Company increased their price objective to $9 from $7 and Credit Suisse raised it to $6 from $4.50.

Analyst view

“Macy’s continues to undergo core operating challenges, similar to peers in the department store space (eg. market share cessation to peers, falling store traffic, contracting margins, eCommerce disintermediation). Despite closing stores proactively, store-only comps remain negative and we forecast them to remain so in the future, eroding ROIC,” said Kimberly Greenberger, equity analyst at Morgan Stanley.

“Expense cuts (eg. headcount reduction), real estate monetization, and secondary growth initiatives are encouraging, but are unlikely to stimulate enough cash flow to reinstate its dividend while also covering upcoming debt maturities. In the event of a 2020 recession, Macy’s likely struggles to survive as it is currently operating,” she added.

Upside and Downside risks

Upside: 1) A return to positive store-only comps while maintaining flow through. 2) Strategic initiatives help drive store traffic. 3) Improved merchandising and supply chain management leads to gross margin expansion. 4) Share buybacks recommence. 5) CECL has no impact to credit profit share – highlighted Morgan Stanley.

Downside: 1) Store-only comps deceleration. 2) CECL has a larger impact than anticipated. 3) 2020 coronavirus/recession impact more severe than anticipated.