Last year, it was too much inventory, and now this year, it's too little demand. Department store operator Macy's (M 1.72%) is having all sorts of trouble navigating a difficult economic environment. Comparable sales tumbled 7.2% in the first quarter, and the company is resorting to heavier markdowns to clear out spring-seasonal merchandise.
The good news is that Macy's is still turning a profit. Through improved inventory management and operational efficiencies, the retailer has managed to prevent its gross margin from dropping despite the tumbling sales. Macy's gross margin was 40% in Q1, up from 39.6% in the same period last year.
The bad news is that profits are down considerably, and 2023 is going to be a tougher year than the company originally envisioned.
NYSE: M
Key Data Points
Slashing the outlook
Back in March, Macy's laid out the following outlook for 2023:
- Revenue between $23.7 billion and $24.2 billion.
- Comparable-sales change between negative 4% and negative 2%.
- Adjusted earnings per share (EPS) between $3.67 and $4.11.
With a tumultuous Q1 in the books, and with increased markdown activity ahead, Macy's is now much less optimistic. Here's the company's new outlook for the year:
- Revenue between $22.8 billion and $23.2 billion.
- Comparable-sales change between negative 7.5% and negative 6%.
- Adjusted EPS between $2.70 and $3.20.
For reference, Macy's reported revenue of $24.4 billion and adjusted EPS of $4.48 in 2022.
One positive for Macy's is that inventory levels have come down over the past year. Inventory stood at $4.6 billion at the end of Q1, down from nearly $5 billion one year prior. The balance sheet is also reasonably strong. Macy's doesn't have a ton of debt -- just under $3 billion -- and the company is now valued below book value.
A cheap-looking stock
Macy's stock looks extremely inexpensive. Based on the midpoint of the company's new guidance range for adjusted EPS, the stock trades for less than 5 times earnings.
The problem, at least for me, is that I can't shake the feeling that Macy's is a sinking ship. Operationally, the company has made big improvements. It's wringing out efficiencies, improving inventory management, and churning out profits in a tough environment. But an expertly managed sinking ship is still a sinking ship.
What does a turnaround for Macy's even look like at this point? The best-case scenario may be treading water, and that's not a very compelling investment thesis. The worst-case scenario, which looks more likely than not to me, is that Macy's will eventually follow in the footsteps of J.C. Penney.
Macy's is in a weird spot in the department store industry. Expensive but not nice. It doesn't have the value proposition of Kohl's or the somewhat-premium cachet of Nordstrom. The entire industry is struggling, but Macy's may be in a worse situation than its peers.
Macy's does own a lot of real estate which could be sold to raise cash. So did Sears before it sold it off and then proceeded to fail anyways. Real estate isn't a strong argument to invest in Macy's stock, in my opinion.
Macy's stock may look cheap, but with earnings falling off a cliff, I'll be staying away. Macy's isn't in any danger of failing anytime soon, but I'm struggling to see any light at the end of the tunnel. While Macy's stock trades at a tantalizing valuation, it doesn't look like a good idea to me.
