Macy's Worst Results Since Recession Could Signal Tough Road Ahead

Macy's, Inc. M shares plunged 15 percent following the company reporting its worst quarterly results since the recession.

Morgan Stanley’s Kimberly C. Greenberger maintains an Equal-Weight rating on the company, while lowering the price target from $40 to $35.

“We've cut our 2016 & 2017 EPS estimates in six of the last seven quarters, highlighting the challenges M and the Department Store sector face,” Greenberger mentioned.

Mounting Structural Concerns

For 1Q, Macy’s reported a 6.1 percent comp decline, falling short of even the most bearish buy side expectations, while missing the estimate and the consensus.

“While unseasonable weather and muted tourism spend were partly to blame, accelerating share loss against easing compares and a favorable macro climate suggests underlying fundamentals are eroding, and we wonder if the current set of initiatives will be enough to reverse the trend,” Greenberger stated.

Related Link: Cowen's Retail Expert Says Macy's Is "Focused On The Right Areas"

In addition, while management confirmed that price margin and increased online price transparency had been driving “irrational” selling behavior in the industry, the analyst pointed out that such headwinds were likely to continue to impact sales and margins in the long term.

What Management Expects

Macy’s reaffirmed its target of eventually returning to EBITDA margins of 14 percent, although Greenberger expressed skepticism regarding this expectation.

The analyst noted that management had not accounted for the need to achieve a significant gross margin recovery in order to meet this target.

In fact, Greenberger expects a 10bps annual EBITDA margin decline for the company in 2017 and beyond.