Macy’s: Strong execution beats financial engineering (NYSE:M)


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Hedge funds might want Macy’s (M) to grow the e-commerce business, but the department store just released numbers supporting the continuation of the current omnichannel business. As the company pushes more towards a digital marketplace platform, the stock remains cheap. My investment thesis remains bullish on Macy’s due to the fundamental shift in the business.

Fundamental business change

Macy’s reported FQ3’21 results that were not only impressive compared to forecasts, but also compared to 2019 figures. Department stores were supposed to never recover from Covid closures, but this retailer just reported a big increase above pre-Covid levels.

One of the main reasons for a new Macy’s is that the company finally continued with its e-commerce initiatives. Despite the economy fully reopening but the absence of international tourism depressing demand, the department store still saw sales up 8.9% from levels in the third quarter of 2019.

Macy’s reported quarterly revenue of $5.44 billion, beating analysts’ estimates of $210 million. The retailer smashed EPS estimates of $0.90 to hit $1.23 in the quarter. By comparison, the company only earned Adjusted EPS of $0.07 in the third quarter of 2019.

The business is very different now with 33% of business coming from digital sales while launch of an organized third-party digital marketplace with Miracle. Online activity accounted for just 23% of revenue in the third quarter of 2019, while sales were down to $5.17 billion.

The indication is that the department store retailer is no longer donating market share to other online retailers. The company added 4.4 million new customers to the brand in the quarter alone.

As Macy’s has finally made headway with e-commerce, the company has cut spending significantly. Inventory levels down 15.4% from 2019 levels drove gross margin up 100 bps to 41.0%, even while absorbing a 170 bps increase in delivery costs .

The company is structurally better with excess expenses removed from general and administrative expenses. Macy’s saw its SG&A spending fall 630 basis points from third quarter 2019 levels to just 36.3%. The department store has benefited from reduced labor costs due to excessive job postings, but some of those positions may be cut permanently.

No help needed

The stock is up 20% on the news because analysts were caught off guard by the big beat. The market simply didn’t expect Macy’s to top 2019 numbers while significantly cutting costs. Analysts only had the retailer hitting 2023 EPS estimates of $3.91, while the company now expects an EPS target of $4.67 for just 2021.

Data by Y-Charts

Macy’s is now making so much money that the board repurchased 13 million shares for nearly $300 million in the October quarter. The department store regularly repurchased shares before the trading difficulties of recent years.

Data by Y-Charts

The company ended the last quarter with a diluted share count of 317.0 million, while period-end shares fell to just 299.3 million. Along with a strong dividend yield of 1.6%, the retailer is suddenly returning a large amount of capital to shareholders as it approaches the best quarter of the year. The decline in the number of shares will further increase 2022 EPS estimates.

The biggest concern here is that management is focusing on hedge fund demands to grow e-commerce business for short-term equity gains rather than focusing on building omnichannel business and expansion of the digital platform. CEO Jeff Gennette continued to make the case for omnichannel business during the FQ3’21 earnings call:

Our data confirms that in markets where we have a physical presence, our online business is stronger. The interaction between our digital and physical assets is more important than ever, and we are focused on establishing an appropriate footprint in the markets that power our sustainable and profitable omnichannel representative.

The company working with consultants seems like a waste of time and money, but AlixPartners has been hired to review the business. The stock is far too cheap at this price of 8x FY21 EPS estimates, but the best way to boost the stock price is stronger quarters.

To take with

The main investor takeaway is that Macy’s is now running at a level suggesting the stock is going much higher. The company that builds an organized digital marketplace will extend the value far beyond any financial engineering of corporate spin-off.

Investors should already own the stock, but Macy’s isn’t too late to own here.

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