While the holiday shopping season is underway, sky-high inflation and the Fed’s aggressive monetary policy have impacted consumer spending. With prices for food, rent, gasoline, and other costs elevated, many shoppers are reluctant to spend.

Although leading retailer Macy’s, Inc. (M) surpassed EPS estimates by 136%, and its revenue was in line with analyst estimates, the company witnessed declining sales in the last reported quarter.

The company reaffirmed its annual 2022 sales guidance and raised its earnings guidance. M expects its adjusted earnings per share to be between $4.07 and $4.27 and its digital sales to be approximately 33% of net sales.

The company’s net income and EPS have grown at CAGRs of 13.5% and 16.5%, respectively, in the past three years.

In addition, institutional investors hold a good 89% of the company’s stock. This suggests some credibility amongst professional investors.

The stock has gained 32.7% over the past three months and 15.8% over the past month. However, it has declined 13.3% year-to-date. It is currently trading 50.3% above its 52-week low price and 20.4% below its 52-week high price.

Here is what could shape M’s performance in the near term:

Unstable Dividend Growth

On October 28, the company’s Board of Directors approved a 15.75 cents per share quarterly dividend payable on January 3, 2023. It pays a $0.63 per share dividend annually, which translates to a 2.69% yield on the current share price. Its four-year dividend yield is 6.69%.

However, the company’s dividend payouts have declined at a CAGR of 25.57% over the past three years and 16.24% over the past five years.

Poor Financials

During the fiscal 2022 third quarter ended October 29, 2022, M’s net sales decreased 3.9% year-over-year to $5.23 billion. The company’s comprehensive income fell 93.4% from the prior-year quarter to $16 million, while its adjusted EBITDA declined 42.6% from the prior-year quarter to $439 million.

Moreover, M’s net income decreased 54.8% year-over-year for the quarter to $108 million, and its earnings per share declined 48.7% from its prior-year quarter to $0.39 for the quarter.

Bleak Analyst Estimates

Analysts expect M’s revenue for the fiscal first quarter ending April 2023 to come in at $5.33 billion, indicating a marginal decrease from the prior-year quarter. The company’s EPS for the same quarter is expected to decrease 33.9% year-over-year to $0.71.

Its revenue estimate of $24.50 billion for the current fiscal year ending January 2023 indicates a marginal growth year-over-year, while its EPS estimate of $4.20 for the same year indicates a 20.9% decrease compared to its prior-year quarter.

However, if we look at the company’s earnings and revenue surprise, M has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

Robust Profitability

M’s trailing-12-month gross profit margin of 40.24% is 13.09% higher than the 35.59% industry average. Its trailing-12-month net income margin of 5.49% is 8.74% higher than the industry average of 5.05%.

Further, M’s trailing-12-month levered FCF margin of 4.51% is 250.56% higher than the industry average of 1.29%. Additionally, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 43.53%, 13.14%, and 7.74% are higher than their respective industry averages of 12.92%, 6.59%, and 4.36%.

Discounted Valuation

In terms of forward EV/Sales, M is trading at 0.50x, which is 55.1% lower than the industry average of 1.11x. The stock’s forward Price/Sales multiple of 0.25 is 71% lower than the industry average of 0.87. Moreover, its forward EV/EBITDA is trading at 4.74x, 49.4% lower than the industry average of 9.37.

Additionally, M’s non-GAAP P/E multiple of 5.40x is 57.8% lower than the industry average of 12.79x

POWR Ratings Reflect Uncertainty

M has an overall rating of C, translating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. M has an A grade in value, in sync with its discounted valuation.

However, it has a D for Growth and Stability, justified by its poor financials in the last quarter and a 24-monthly beta of 1.77.

M is ranked #15 out of 66 stocks in the C-rated Fashion & Luxury industry.

In addition to the POWR Ratings stated above, we have also given M grades for Momentum and Sentiment. Get access to all M ratings here.

Bottom Line

The company has an attractive valuation and robust profitability. However, macroeconomic headwinds make M’s near-term prospects look uncertain. Therefore, I think investors should wait for a better entry point in the stock.

How Does Macy’s, Inc. (M) Stack up Against Its Peers?

While M has an overall POWR Rating of C, one might consider looking at its industry peers, J. Jill, Inc. (JILL), Hugo Boss AG (BOSSY), and Chico’s FAS, Inc. (CHS), which have an overall A (Strong Buy) and B (Buy) rating.

M shares were trading at $22.37 per share on Tuesday morning, down $0.32 (-1.41%). Year-to-date, M has declined -12.54%, versus a -15.70% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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