RBC Not Adding Macy's To Its Shopping Cart Despite M&A Rumors

Despite takeout rumors, RBC Capital is not excited on Macy's Inc M as it expects core business to be increasingly challenged by competitive pressures, while margins also remain depressed by pricing headwinds and costly growth investments.

Analyst Brian Tunick reiterated his Sector Perform rating on Macy’s, which recently reported disappointing fourth-quarter numbers and weak outlook.

Rating's Justification

Tunick is skeptical about Macy’s ongoing initiatives to improve sales and potential M&A as well as real estate opportunities.

“A potential takeout (according to an unconfirmed article in the WSJ) and/or significant monetization of M's real estate pose an interesting setup, however, we believe there are still too many unknowns to get more constructive,” Tunick wrote in a note.

Related Link: Look At How Macy's And Amazon Have Changed Over The Past Decade

Specifically, on the real estate front, the analyst said Macy’s real estate gains will be smaller in the near term unless the company is taken out in a levered buyout. The analyst pointed out that the company has realized only about $750 million from its real estate assets versus estimated valuation of up to $20 billion.

The analyst noted that the help Macy’s got from the momentum in accessories brands, increased tourist spending and outsized e-commerce growth are all shrinking, thereby making growth more challenging and costly.

Tunick also sees increased online penetration and free shipping is expected to more than offset potential merchandise margin upside from inventory management.

Analyst's Bottom Line

“Although we are encouraged that ~43 percent of M’s product sold is private label or exclusives, we view M at a vulnerable spot, as Amazon.com, Inc. AMZN’s intensifying push into apparel more closely targets M’s more core customers,” Tunick added.

Shares of Macy’s closed Wednesday’s trading at $32.36. Tunick has a price target of $35. In Thursday's pre-market session, shares were slightly depressed, down 0.12 percent at $32.32.