Macy's Downgraded At This Investment Firm: Here's Why

Stifel’s Richard E. Jaffe downgraded the rating for Macy's, Inc. M from Buy to Hold, while removing the price target. Against a weak macro-environment, the company issued “appropriately” conservative guidance.

Macy’s reported its 4Q adj. EPS at $2.09, beating the Stifel estimate of $1.90 and consensus of $1.89. The EPS figure excludes $177 million of impairment, store closing and other costs, while including gains of $84 million of the approximate $250 million to be realized from the sale of Brooklyn, $18 million from the Mission Valley store and $12 million in miscellaneous gains.

Comp store sales declined 4.8 percent on a company-owned basis and were down 4.3 percent when including leased departments, due to weak domestic spending during the Holiday season. Analyst Richard Jaffe mentioned, however, that sales trends improved in January, with more favorable weather conditions.

Management announced its 2016 EPS guidance at $3.80-$3.90, incorporating a comps decline of 1.5 percent, which “reflects our outlook that the business will continue to be challenged,” Jaffe said.

“Merchandising initiatives and magic selling efforts could not offset the impact of slow traffic, resulting in a sales shortfall in 2015. Omnichannel sales have grown rapidly but not without significant cost; the investment in the omnichannel venue and fulfillment capabilities and the cost of sales cannibalized from the bricks and mortar stores, deleverages those assets,” the analyst wrote.

He expressed concern regarding the weak sales and rising expenses. While the dividend yield of 3.4 percent appears to be “reasonably secure,” Macy’s could slow down its share repurchase activity.

Jaffe expects modest growth in 2016 and some fundamental improvement in the business in 2017, with marginal comp sales growth and margin expansion.