What happened
Shares of Macy's (M 1.59%) were slipping today after the department store chain was downgraded by Credit Suisse, along with Gap and L Brands.
As a result, Macy's stock was down 4.4% at 11:14 a.m. EDT after falling as much as 5.6% earlier in the session. Gap and L Brands took the news even harder, trading down 5.4% and 8%, respectively.
Macy's flagship store on Herald Square. Image source: Macy's.
So what
Analyst Michael Binetti at Credit Suisse lowered his rating on Macy's from neutral to underperform and slashed his price target from $19 to $12 on broad concerns that the retailer's performance was weakening. Binetti said that same-store sales for the third quarter were likely below expectations, and that even if the company guided for comps growth in the fourth quarter, that would probably assume declining gross margin due to markdowns.
He added that structural problems were likely to accelerate next year and believed 2020 analyst estimates would be revised significantly lower. Binetti was generally bearish on apparel retailers, citing several other sector stocks, though he only downgraded Macy's, Gap, and L Brands.
Now what
The downgrade came on the same day that Macy's announced a new men's shopping experience at its flagship store in New York's Herald Square. The refurbished department will include a curated space called The Park that will carry cutting-edge fashion and be completely refreshed every 8 to 12 weeks.
Macy's seems to have substantial unrealized potential, especially with its trove of real estate, acquisition of Story, and its off-price Backstage chain. Management should be more aggressive about closing or downsizing underperforming locations, streamlining inventory, and embracing change quickly.
The stock is dirt cheap by conventional measures and offers a dividend yield near 10%. But it's up to management to change the company's trajectory and stem the recent profit slide that has analysts like Binetti dumping the stock.
