4 Reasons Macquarie Has Moved To The Sidelines On Macy's

Macquarie downgraded Macy's Inc M to Neutral from Outperform as it expects the sales shortfall from the closure of 100 stores could exceed the company's estimate of $1 billion.

"We have difficulty in seeing that the 100 store closures will only impact sales by $1B. We are modeling for sales to decline by $2B from $26B in 2016 to $24B in 2017," analyst Laurent Vasilescu wrote in a note.

Second, the analyst expects the move may put more pressure on the gross margin as well as the SG&A line. The analyst recalled that the 40 store closures carried out last year significantly pressured the fourth quarter 2015 gross margin in order to liquidate these stores.

Related Link: What Do Macy's 100 Store Closures Mean For The Company?

Third, Macquarie remains cautious on the sector despite positive tone on the progress of back to school sales, as "there is still way too much inventory across the U.S. retail landscape."

Fourth, "we frustratingly maintained our Outperform rating on Macy's and with the name today surpassing our maintained Price Target of $38, this gives us an opportunity to move to the sidelines."

Meanwhile, the analyst maintained his FY16 EPS estimate of $3.28 (versus guidance of $3.15 to $3.40). However, the analyst cut significantly his FY17 EPS view to $2.40 from $3.57 to factor in the top line impact and the gross margin and SG&A pressures associated with 100 store closures.

"While we continue to see no turn around in a structurally challenged bricks and mortar environment, we will continue to focus on channel agnostic brands that have greater international potential, grow revenues, grow the bottom line and grow by growing," Vasilescu highlighted.

As such, the analyst prefers Nike Inc NKE, VF Corp VFC, Under Armour Inc UA, Ralph Lauren Corp RL, Columbia Sportswear Company COLM and others.