Watch For Stabilization In Sales/EBIT Before Getting Constructive On Macy's

Macy's Inc M shares declined 17 percent following its Q2 results. Morgan Stanley’s Kimberly C. Greenberger maintained an Equal-weight rating on the company, while lowering the price target from $37 to $35.

“We are encouraged by plans to close ~100 underperforming doors against the evolving retail backdrop. But to grow more constructive on the stock, we need to see sales/EBIT stabilization following the largest 1H decline since the recession,” Greenberger mentioned.

Related Link: Citi Thinks Macy's Management Now Understands The New Retail Environment

Store Closures

Management has announced plans to close 100 underperforming stores by early 2017, which are expected to lower sales by $1 billion, along with potential EBITDA erosion, offset by the company’s new savings initiatives.

“We view this as an important step forward for Macy's, particularly vs. peers, as it adapts to the evolving retail environment and focuses sharply on improving ROIC,” the analyst stated.

Greenberger believes management is taking the right strategic decisions, given the current retail environment, although returning to EBITDA margins of 14 percent still seems to be a “lofty” target.

Results

Macy’s delivered Q2 comps ahead of the estimate and the consensus, which management attributed to the favorable weather, improved tourism spend, key sales initiatives, and better pricing and robust promotional events.

The gross margin also came in ahead of the estimate and consensus, driven by stronger than expected sales, effective promotions and the success of the Last Act clearance initiative.

However, total sales, operating income and transactions declined during the quarter.

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