Digging Into Macy's Valuation
Macy's, Inc. (NYSE: M) reports fiscal Q1 earnings Tuesday, May 12 after the market closes. Prudena's models suggest that the stock is appropriately priced at $66.03. Analyst opinion is largely neutral, in agreement with the models.
Consensus earnings estimates call for $0.62 EPS on $6.32 billion in revenue.
In the earnings release and following conference call, investors should pay attention to comments regarding the impact of weather on the timing of traffic and pent-up demand, continued online sales efforts and same-day delivery capacity, the ongoing impact of restructuring on GAAP profits, and any update on operational benefits from restructuring.
Assuming an 8 percent required rate of return, Prudena's basic model estimates a value of $63.33 for Macy's shares. A Monte Carlo simulation offers a slightly higher valuation of $64.30. These values are 4.1 percent and 2.6 percent below the current price of $66.03, respectively. Using an 8 percent require rate of return, the current market price implies 0.8 percent long term residual earnings growth. Macy's is a mature business with heavy analyst coverage, so modest residual earnings growth figures are very reasonable.
Prudena's models indicate that Macy's stock is appropriately valued with the available fundamentals and wall street earnings estimates.
The Bull Case
Revenue has consistently grown, as have profit margins, albeit modestly in both cases. Macy's has wisely undertaken a restructuring to address evolving consumer behavior.
The restructuring affects marketing and merchandising, and the company is shifting emphasis to online sales channels and same-day-delivery functions which allow customers to pick up items from a local store that were purchased online.
The Bear Case
The retail industry, especially among firms targeting the middle class, is highly competitive. The influence of Amazon and low-cost mega stores like Walmart inhibit pricing power for retailers outside of the luxury space. Low-single-digit same store sales growth and steady mid-single digit net margin reflect the challenges faced by industry participants. Top line growth has been positive, but is decelerating.
The rise of online shopping and local, mobile customer targeting is fundamentally altering the way consumers make purchasing decisions. Also, the company is closing more stores than it is opening. While this move may be prudent and ultimately good for bottom line, it indicates limited opportunity for Macy's traditional model.
Macy's is operating in a highly competitive industry which is increasingly being challenged by changing consumer behavior. The company is taking positive steps to keep up with changes, but they will struggle with the fact that their established model is being questioned by increasingly market savvy consumers armed with mobile devices.
Prudena's models support the generally neutral analyst opinion, suggesting that the Macy's shares are slightly overvalued at $66. For Macy's to surprise to the upside in the long term, the company's model will likely have to undergo substantial transformation, which comes with execution risk.
Competition from established e-commerce platforms, specialized luxury retailers, and low cost diversified retailers are all risks to Macy's long term viability.
Contributors: Ryan Downie
Published: 5/12/2015 8:00:00 AM UTC
NOTE: The Morning Monte is high-level, and any investment requires a deeper analysis than is presented here. The comments in the Morning Monte are intended to help guide your research and ground you in the fundamentals of the company. In no way should the comments in The Morning Monte be taken as advice to buy or sell a particular equity. Some of the statements are forward looking. As such, these statements are speculation--so beware! The comments represent the views of the author and are not necessarily the views of PRUDENA™.
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