January 19, 2015 Macy s, Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 11/24/2013 Current Price (01/16/15) $63.14 Target Price $66.00 52-Week High $67.81 52-Week Low $50.91 One-Year Return (%) 14.27 Beta 1.02 Average Daily Volume (sh) 4,004,899 Shares Outstanding (mil) 345 Market Capitalization ($mil) $21,801 Short Interest Ratio (days) 3.57 Institutional Ownership (%) 90 Insider Ownership (%) 2 (M-NYSE) SUMMARY Macy's is adopting extensive restructuring involving store closures and layoffs, which will result in $140 million in annual cost savings beginning 2015. However, in relation to this the company is expected to incur charges that might prove a drag. Nevertheless, the company plans to divert the savings from these restructuring activities to further develop its omni-channel capacities, build superior security infrastructure and enhance direct-toconsumer fulfillment capacity. Along with its restructuring plan, Macy s reported that comparable sales on an owned plus licensed basis grew 2.7% for November and December period. The company s various initiatives like My Macy s localization, omni-channel integration and Magic Selling helped it to deliver impressive sales numbers over the holiday season after a mediocre third-quarter fiscal 2014 performance. Currently, we maintain our Neutral recommendation on the stock. Risk Level * Below Avg., Type of Stock Large-Growth Industry Retail-Rgn Dept Zacks Industry Rank * 222 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Apr) (Jul) (Oct) (Jan) (Jan) Annual Cash Dividend $1.25 Dividend Yield (%) 1.98 5-Yr. Historical Growth Rates Sales (%) 4.0 Earnings Per Share (%) 25.2 Dividend (%) 58.7 2012 6,143 A 6,118 A 6,075 A 9,350 A 27,686 A 2013 6,387 A 6,066 A 6,276 A 9,202 A 27,931 A 2014 6,279 A 6,267 A 6,195 A 9,405 E 28,146 E 2015 6,439 E 6,365 E 6,324 E 9,648 E 28,776 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year using TTM EPS 14.6 (Apr) (Jul) (Oct) (Jan) (Jan) 2012 $0.43 A $0.67 A $0.36 A $2.05 A $3.46 A using 2014 Estimate 14.5 2013 $0.55 A $0.72 A $0.47 A $2.31 A $4.00 A using 2015 Estimate 12.9 2014 $0.60 A $0.80 A $0.61 A $2.34 E $4.35 E 2015 $0.69 E $0.93 E $0.65 E $2.62 E $4.89 E Zacks Rank *: Short Term The quarterly figures may not add up to annuals due to rounding off 1 3 months outlook 3 - Hold Projected EPS Growth - Next 5 Years % 14 * Definition / Disclosure on last page 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 1820 and based in Cincinnati, Ohio with an additional office in New York, Macy s, Inc. (M) is one of the leading department store retailers in the United States. The company through its retail stores and Internet websites (macys.com and bloomingdales.com) trades in a wide range of merchandise, including men s, women s and children s apparel and accessories, cosmetics, home furnishings and other consumer goods in 45 states, the District of Columbia, Guam and Puerto Rico. The company currently operates approximately 840 department stores. The company operates 13 Bloomingdale s Outlet stores. In Dubai, Bloomingdale s is operated by Al Tayer Group LLC under a license agreement. Macy's, Inc. was known as Federated Department Stores, Inc. prior to June 1, 2007. REASONS TO BUY Growth Drivers: We believe Macy s sustained focus on price optimization, inventory management, merchandise planning, and private label offering are the primary catalysts driving traffic, facilitating in meeting customer-oriented demand and improving in-store shopping experience. In an attempt to increase sales, profitability and cash flows, the company has been taking steps such as integration of operations, consolidation of divisions as well as developing e-commerce business and online order fulfillment centers. Going forward, management remained optimistic of capturing sales opportunities with its fresh inventory along with My Macy's localization initiatives, omnichannel integration and Magic Selling. The company s Buy Online Pickup in Store initiative is also gaining traction. The company also introduced various innovative services including Apple Pay, Same Day Delivery, Enhanced Shopping Apps, Innovation in Stores Selling Technology, Macy s Image Search, and Macy s Wallet/Bloomingdale s Wallet. Macy s Undertakes Restructuring Plan: Macy's is adopting extensive restructuring involving store closures and layoffs, which will result in $140 million in annual cost savings beginning 2015. The need to be in sync with the changing trends and boost sales has compelled Macy s to adopt restructuring. The company will merge the merchandising and marketing operations of both its stores and online portal into one. The same will also be applicable to its Bloomingdales brand. Moreover, at local district level, Macy s will put an end to district planner positions and build new regional teams to better understand needs of merchandise localization. The company plans to divert the savings from these restructuring activities to further develop its omni-channel capacities, build superior security infrastructure and enhance direct-to-consumer fulfillment capacity in all full-line Macy s and Bloomingdale s stores and at the five fulfillment centers. My Macy s Initiative: We remain optimistic about the company s customer-centric localization initiative called My Macy s. The program aims at improving comparable-store sales and reducing operating expenses, with stores and merchandise assortments focusing on local customer needs and preferences. Active Management of Cash Flows: Macy s has been actively managing its cash flows. The company has been repaying debt, making prudent capital expenditures in store openings and returning much of its free cash to shareholders via dividend and share repurchases. During the first quarter of fiscal 2014, the company raised its quarterly dividend by 25%. During the third quarter, the company bought back approximately 9 million shares for about $534 million. On the store front, the company plans to open a 150,000 sq. feet Bloomingdales outlet in San Jose, CA and a 155,000 sq. feet Macy s store in Los Angeles, CA along with 7 other Macy s and Bloomingdale s stores, which are still in planning stage or under construction. The company also plans to open Macy s store in Ponce, PR; Kapolei, HI; and Miami, FL, and Bloomingdale s stores in Honolulu, HI and Miami, FL. Equity Research M Page 2
Management also plans to open new Macy s and Bloomingdale s stores in Al Maryah Central in Abu Dhabi, United Arab Emirates, in 2018 under license agreements with Al Tayer Group. REASONS TO SELL Competitive Pressure: Macy s operates in the highly competitive retail merchandise sector. The company faces stiff competition from a diverse group of competitors, such as Wal-Mart, Target, Bed Bath & Beyond, general merchandise stores, specialty stores and discount stores, which will likely continue to weigh on its results. We also remain concerned about Macy s low pricing power as against other discount chains, which may in turn hurt the company s market share. Cannibalization a Threat: The company s expansion in the regions it already serves could cannibalize its sales performance and lower traffic counts, at its existing stores in the area. Consequently, this may have a negative impact on the company s overall performance. Moreover, a saturated store base leaves little room for expansion. Macroeconomic Headwinds: The company s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company s growth and profitability. RECENT NEWS Macy's Announces Extensive Restructuring, Store Closures January 8, 2015 Macy's, Inc. announced extensive restructuring, including store closures and layoffs. The announcement overshadowed Macy s decent holiday comps report. Restructuring measures are impressive and will result in $140 million in annual cost savings beginning 2015, however, $100 $110 million cost to be incurred to implement the same might prove a drag. The need to be in sync with the changing trends and boost sales has compelled Macy s to adopt restructuring. The company will merge the merchandising and marketing operations of both its stores and online portal into one. The same will also be applicable to its Bloomingdales brand. Moreover, at local district level, Macy s will put an end to district planner positions and build new regional teams to better understand needs of merchandise localization. The changes are likely to put at risk 265 positions at central offices of Macy s and Bloomingdales and at local markets across the U.S. The company is looking to absorb some of this workforce in its other divisions. Also, the company will be closing 14 Macy s stores by spring 2015. These 14 stores generate annual revenues of $130 million on an average. Moreover, it expects to lay off 2,200 employees at various store levels following rationalization of store and field operations. The company plans to divert the savings from these restructuring activities to further develop its omnichannel capacities, build superior security infrastructure and enhance direct-to-consumer fulfillment capacity in all full-line Macy s and Bloomingdale s stores and at the five fulfillment centers situated at Tennessee, Arizona, California, Connecticut and West Virginia. Equity Research M Page 3
Moreover, the company plans to open a 150,000 sq. feet Bloomingdales outlet in San Jose, CA and an 155,000 sq. feet Macy s store in Los Angeles, CA along with 7 other Macy s and Bloomingdale s stores, which are still in planning stage or under construction. The company also plans to open Macy s store in Ponce, PR; Kapolei, HI; and Miami, FL, and Bloomingdale s stores in Honolulu, HI and Miami, FL. Management also plans to open new Macy s and Bloomingdale s stores in Al Maryah Central in Abu Dhabi, United Arab Emirates, in 2018 under license agreements with Al Tayer Group. Macy s also reported that comparable sales on an owned plus licensed basis grew 2.7% for the months of November and December 2014. Further, on an owned basis, comps were up 2.1% for the same period. The company s various initiatives like My Macy s localization, omni-channel integration and Magic Selling customer engagement helped it to deliver good sales numbers over the holiday season after a mediocre third-quarter fiscal 2014. Buoyed by positive comps data, the company revised its fourth-quarter fiscal 2014 outlook. Comps, on an owned plus licensed basis, are now expected to be in the range of 2.5%-3% as against 2%-3%. Further, comps, on an owned basis, are expected to be in the range of 1.9%-2.4% as against 1.8%-2.8%. For full-year 2014, comps, on an owned plus licensed basis, are projected to be in the range of 1.4%- 1.5% as against earlier guided range of 1.2%-1.5%. However, the company reiterated its full-year earnings guidance range of $4.25 to $4.35 per share. Macy's Q3 Earnings Beat Estimates, Sales Miss, Outlook Cut November 12, 2014 Macy s Inc. posted third-quarter fiscal 2014 results, wherein earnings of $0.61 per share surpassed the Zacks Consensus Estimate of $0.49, and surged 29.8% from $0.47 earned in the prior-year quarter. Lower cost of sales, fall in selling, general and administrative expenses and share repurchase activity supported the bottom line. However, sales fell short of management s expectation. This Cincinnati, OH-based company generated sales of $6,195 million that came below the Zacks Consensus Estimate of $6,346 million, and also slid 1.3% year over year. Consequently, management trimmed its sales and earnings forecast. Despite lower-than-expected sales, management remained upbeat about the fourth quarter because of the upcoming holiday season, Buy Online Pickup in Store initiative and Same Day Delivery program. Moreover, My Macy's localization initiatives, omnichannel integration and magic selling still remained the driving factors. Favorable weather conditions would also boost sales. Comparable-store sales for the quarter declined 1.4%, while including sales generated from third-party licensed departments, comparable sales fell 0.7%. Gross profit in the quarter dropped 1.2% year over year to $2,429 million. However, gross profit margin remained flat at 39.2%. Operating income grew 17.2% to $422 million, whereas operating margin expanded 110 basis points to 6.8%. Management anticipates gross margin to remain even or contract during the fourth quarter. Store Update In the quarter under review, the company opened 3 new Macy s outlets in Sarasota, FL; Las Vegas, NV; and The Bronx in New York City, and shuttered Macy s stores in Bradenton, FL and York, PA. In Torrance, CA, 3 Macy s outlets were combined into two. A new Bloomingdale s replacement outlet was opened in Palo Alto, CA. Equity Research M Page 4
Other Financial Aspects Macy s ended the quarter with cash and cash equivalents of $1,048 million, long-term debt of $6,736 million, and shareholders equity of $5,351 million. Macy s has been actively managing its cash flow, returning much of its free cash to shareholders via dividends or share repurchase activity, and maintaining a healthy balance sheet and credit ratios necessary for an investment-grade rating. During the quarter, the company bought back approximately 9 million shares for about $534 million. So far in the fiscal year, the company has bought back about 25.3 million shares for approximately $1.48 billion. As of Nov 1, the company had about $1.45 billion at its disposal under the share repurchase authorization. The company generated net cash flow of $777 million from operating activities in the first three quarters of fiscal 2014 compared with $819 million in the prior-year period. Guidance Including sales generated from third-party licensed departments, comparable-store sales are expected to increase between 1.2% and 1.5% (or 0.7% to 1% excluding licensed businesses) in fiscal 2014. Earlier, the company had projected comparable-store sales growth of 2% to 2.5% for the full year (or 1.5% to 2% excluding licensed businesses). For the fourth quarter, management projects comparable-store sales, including sales generated from third-party licensed departments, to increase by approximately 2% to 3% (1.8% to 2.8% excluding licensed businesses). Macy s also lowered its full-year earnings projection to a band of $4.25 to $4.35 per share from $4.40 to $4.50. Equity Research M Page 5
VALUATION Macy s current trailing 12-month earnings multiple is 14.6X, compared with 15.0X industry average and 18.3X for the S&P 500. Over the last five years, Macy s shares have traded in a wide range of 10.3X to 15.4X trailing 12-month earnings. The stock is also trading at a discount to the peer group, based on fiscal 2014 earnings estimate and at a premium based on fiscal 2015 earnings estimate. Our target price of $66.00, 13.5X 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Macy s, Inc. (M) 14.5 12.9 13.0 9.0 14.6 15.4 10.3 Industry Average 14.6 12.0 11.6 6.5 15.0 142.0 10.6 S&P 500 15.9 14.9 10.7 15.9 18.3 19.4 12.0 Kohl s Corporation (KSS) 14.5 13.1 10.0 7.1 14.7 17.0 9.9 J. C. Penney Company, Inc. (JCP) 171.7 16.0 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B P/B ROE D/E Div Yield 5-Yr High 5-Yr Low Last Qtr. Last Qtr. Macy s, Inc. (M) 4.2 4.2 1.4 27.2 1.3 1.9 7.5 EV/EBITDA Industry Average 2.4 2.4 2.4-0.2 4.3 1.2 3.9 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research M Page 6
Earnings Surprise and Estimate Revision History Equity Research M Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of M. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1111 companies covered: Outperform - 15.3%, Neutral - 78.0%, Underperform 6.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research M Page 8