Deutsche Bank Downgrades Macy's; Says 'Don't Catch A Falling Star'

In a report published Monday, Deutsche Bank analyst Paul Trussell downgraded the rating on Macy's, Inc. M from Buy to Sell, while reducing the price target from $71 to $63.

Analyst Paul Trussell said that he had “low confidence” in Macy’s being able to “bust out of its SSS rut,” while also citing sales deleverage and “increasing pressure from shipping, healthcare, and retirement expenses,” as reasons. Trussell expects the company’s EBITDA to remain “flattish with capex constant,” thereby exerting pressure on free cash flows, which in turn would lower share repurchase activity.

In the report Deutsche Bank notes factors that could cap EPS growth at MSD-HSD over the next couple of years:

• “Anemic comp sales growth driven by category challenges, tourism headwinds, declines at KORS, vendors as competition, and one less F&F sale (2Q15 impact)
• Flattish EBITDA with sales deleverage, no relief in the promo environment, increasing healthcare and retirement spend, and increasing shipping costs
• A slower pace of share buyback as no EBITDA growth coupled with constant capex should pressure FCF while M is already approaching the high end of its target leverage ratio range”

If Macy's is able to unlocking its real estate portfolio, this may “drive significant value,” since real estate optionality has received investor attention in recent months. Trussell added, however, that the likelihood of this happening was low.

The EPS estimate for FY15 has been reduced from $4.73 to $4.67, reflecting a downward revision in SSS from 1.3 percent to 1.0 percent and EBITDA margin from flat to down 8 bps.

The EPS estimate for FY16 has been reduced from $5.42 to $5.03, reflecting a downward revision in SSS from 1.8 percent to 1.4 percent and EBITDA margin from 14.2 percent to 13.7 percent as well as lower share repurchases.