Macy’s, Inc. (M) Action Call | Buy | 12 Month Price Target $10.55
Action Call – Buy
Macy’s, Inc. (M)
12 Month Price Target, $10.55
Macy's, Inc., (M), an omnichannel retail organization, operates stores, websites, and mobile applications under the Macy's, Bloomingdale's, and bluemercury brands. The firm sells a range of merchandise, including apparel and accessories for men, women, and children, cosmetics, home furnishings, and other consumer goods. As of February 1, 2020, the company operated 775 store locations in 43 states, the District of Columbia, Puerto Rico, and Guam. Macy's, Inc. was founded in 1830 and is based in New York, New York. As Covid shopping restrictions ease in some states and as the Holiday season starts, we believe Macy’s, Inc. will benefit from an increase in in-store consumer shopping, the company’s extensive infrastructure for curb-side pickup, and growing digital sales. We believe M is an attractive investment because:
1. The company is largely undervalued relative to its peers on a Price to Sales, Price to Book, and Enterprise Value to EBITDA basis.
2. According to the U.S. Census Bureau on October 16, 2020, headline August retail sales (excluding automobiles) sequentially increased 1.5% and 5.4% year-over-year. This percentage growth beat consensus expectations of 0.4%. Clothing and accessories led the gain with an 11% sequential increase. The unexpected gain in retail sales comes after historically high rates of savings, specifically the consumer savings rate reached a high of 33.6% in April and was 14.1% in August. Furthermore, as states ease Covid shopping restrictions, consumers will have more options of where and how to purchase gifts for the Holidays. For example, some California counties are now increasing store occupancy rates from 25 to 50% as risk levels abate which further suggests a potential increase to M’s top-line.
3. Management has been taking appropriate actions to navigate through the pandemic. Management has invested in M’s strong online presence, accounting for 54% of total sales in Q2 with 53% growth year-over-year. Second, M has a large infrastructure for a curb-side pickup option (775 stores now open). Third, M recently signed a five-year partnership with Swedish buy-now, pay-later group, Klarna, that enables customers payment flexibility with the ability to make payments in four interest-free installments. M is the only apparel website that offers this feature. Fourth, M has partnered with DoorDash to allow for same-day delivery service at nearly 500 of its stores nationwide. And lastly, management is cutting expenses and is on track to reduce them by $2.1 billion by the end of 2021. With an increase of four million new online shoppers over the last three months, the closing of competitors such as J.C. Penney, Lord & Taylor, Neiman Marcus, and Pier 1, and $1.4 billion of cash and $3.0 billion of untapped credit capacity, Macy’s management believes the firm will not only weather the storm, but gain market share.
4. Valuation. We equally blend valuations from M’s P/S, EV/EBITDA, and P/B ratios. Given the deterioration of M’s sales due to the pandemic and management’s efforts to improve profitability, we are forecasting M’s P/S ratio to expand to just 25% of the average peer group over the next 12 to 18 months. Over the next two quarters, it is worth mentioning that M’s sales have positive seasonality and should further see strength and improvement from quarantined Americans that are eager to purchase new apparel both for themselves and for their loved ones in a safe, Covid-free environment. Therefore, if we assume no growth to sales (even with stores reopening and easing Covid shopping restrictions) and apply 25% of M’s peer group average P/S ratio of 0.87, we forecast a 12-month price of $14.63. Furthermore, if we assume as well that M’s EV/EBITDA ratio expands to 75% of M’s peer group average EV/EBITDA ratio of 22.78, we forecast a 12-month price of $9.06. Similarly, if we assume M trades at book value (a conservative estimate given M’s peer group average is 6.64), we forecast a price of $7.95. The average of these three prices is $10
- M has trouble increasing in-store sales due to restrictive quarantine measures.
- Holiday apparel spending is not as strong as anticipated.
- The Corona virus has a second outbreak, leading to more store closures.
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