Macy's Earnings Preview - Just 'Meh' Or A Sunny Surprise?

On May 11, Sterne Agee/CRT (SA/CRT) released an earnings preview for department store stalwart Macy's

, which was a bit of a mixed bag. Macy's operates ~885 stores located in 45 states, the D.C. area, Guam and Puerto Rico under the brands Macy's, Bloomingdale's, Bloomingdale's Outlet and Bluemercury, as well as related websites. Just last week, Macy's announced an initial four store NYC pilot of its new SF Macy's Backstage off-price concept, in stores averaging 30,000 square feet. SA/CRT noted that after Macy's shares had reached an all-time high this past April, they have fallen back prior to reporting Q1 earnings on Wednesday before the bell. Tale Of The Tape

Macy's has traded in a 52-week range of $54.29 to $69.98, closing at $65.92 on Friday, or 6.2 percent off of its recent all-time high. SA/CRT also noted a concern regarding promotions from Buy-rated Kohl's

and JC Penny

rated Neutral, "potentially curtailing traffic into Macy locations." SA/CRT - Macy's: Maintain Neutral, $62 PT The SA/CRT $62 price target represents a potential ~6 percent further downside to M shares from Friday's close. The SA/CRT Macy's PT was based upon ~12x its 2016 estimated EPS of $5.00 per share; noting Macy's is currently trading at 13.2x 2016E EPS. SA/CRT - Macy's Rationale  Headwinds: SA/CRT noted Q1 headwinds, including: "poor February weather, West Coast port issues, strong dollar effect on NYC tourism, [and] soft March retail sales."  Y/Y Comps: During the same period last year, Macy's sales fell 1.6 percent, which effectively lowers the bar, making this quarter Y/Y comparisons much easier.  M Q1 EPS: SA/CRT expects Q1 EPS of $0.60, below the consensus of $0.62; this "estimate is predicated on 'flat' sales growth driven by a 1.9% drop in square footage, offset by the aforementioned 1.5% comp estimate."  SA/CRT also "models 'flat' gross profit margins at 38.9% and a 32 bps increase in SG&A..."  Q2 Weather Tailwind: Improving weather so far in May could boost Q2 sales trends, particularly footwear and apparel, with SA/CRT estimating "every 1 degree warmer temperature in the Spring drives a 200-500 basis points increase to apparel/footwear sales."  Share Buybacks: SA/CRT noted that $384 million in company share buybacks have resulted in ~7.5 percent decrease in M shares outstanding, which will help M to achieve its Q1 $0.60 EPS estimate. SA/CRT - Questions For Management 1. Update on same day delivery test and potential sales benefit? 2. Color on Bluemercury integration and strategic plans for the business over time? 3. Progress on inventory management including single view of inventory? 4. Details on later inning benefits from My Macy's and Magic Selling strategic initiatives? 5. Latest thoughts on International and Backstage growth strategy? 6. Details on quarter-to-date trends and any evidence of "pent-up demand"? SA/CRT - Bottom Line "Decelerating sales and lack of margin growth are rarely the ingredients for a winning investment and Macy's finds itself in that predicament..." The retail team at SA/CRT prefers its Buy-rated Kohl's in the department store space at this time.