Undervalued and Underappreciated, Macy's Eyes a Turnaround

0:00Welcome back to next year and investing. It's time to take a look at Macy's earnings with our next gas and that's David Swartz, the senior equity analyst at Morningstar who's taken a look here at the company with us. You know, I look at the year that has been so far for Macy's. David really seems like it up and down sort of fits in starts sort of a price performance. I'm curious your thoughts on the most recent quarter? Yeah, the quarterly results were a little bit better than expected. I think the sales were slightly better. The company reported 2.7% same-star sales growth over all. And that's a couple points better than my expectation. If you look at the different brands that Macy's has, it has the course of Macy's brand but also Blue Mercury and Bloomingdale's. And Bloomingdale's and Blue Mercury have really been outperformed in Macy's. They are a smaller part of the business and so that has less effect on the overall results. But it does give some indication that the upper end of the company is doing better and Tony Spring, the CEO,

1:00has made an effort over the last couple of years to try to make Macy's more of a premium or even luxury company to try to differentiate from other retailers that are out there. And there were some signs that that has happened in his past quarter and in previous quarters. The company's now had five straight quarters of comparable sales growth. And despite that, you see a situation especially given the fact stocks pulling back over 4% here, where perhaps there is a mismatch in what you believe is a fair value estimate for the company and the current share price. Yeah, my current fair value estimate is $25.50. So it's a few dollars above where the current stock price is. So I think it's a little bit undervalued and they revised that as time goes on. But for now, I don't think that Macy's is super expensive. The company's going to earn about $2.20, probably this year in adjusted EPS. And so it's trading to the PE of 10.

2:00Now there are reasons for that, of course, which is that department stores in the US have been struggling for a long time. But Macy's has really improved its balance sheet. The company's financial situation right now is much better than it was four or five years ago coming out of the pandemic when it really had a lot of debt. And people were asking me if Macy's would even survive at all. And I did tell people that Macy's would survive and it has. And the company has paid down a lot of its debt and has become more financially stable. But the reality is that its margins are still low. This is still a company that is struggling to even reach 4% to 5% operating margins. And so people just don't want to really invest in department stores. And so we're seeing kind of a stock that has not really been a strong performer. But it is up from where it was at one time. So there are some signs of progress. Yeah, and perhaps one that may take patience may not. I mean, it has certainly made some swift moves at times as well.

3:00Last thing I got for you, if you were guess we're to really, you know, kind of sit there and think. You think it's the risk that you describe when it comes to Macy's, maybe some of its peers. Is it more likely the risk or sort of company specific execution risks, mismanagement of inventory, etc. Or is it more kind of macro economy and the shifts that you're seeing away from big box and department stores? I think the risks are mostly external. I think Macy's is generally a well run company. The problem for Macy's is that it is dependent on the economy being fairly good. It is dependent on consumer spending. And so, you know, higher gas prices that we're seeing now and, and, you know, some unemployment and things like that, you know, will affect Macy's. And there's not a lot that Macy's can do about that. It also can't do much about the competition, which just gets seemingly stronger every year with stores like Ross just continually putting huge pressure on Macy's and Macy's margins.

4:01So a lot of the issues are external and that's why people don't really want to invest in department stores. My only opinion is that some day Macy's will probably go private because investors just don't want to invest in this company. Yeah, it'll be interesting to see if that does happen. Another has been discussions for various, you know, department stores in that space, Nordstroms at time as well. Thanks to David for joining us here, David Swartz, senior equity analyst, Morningstar. You