Macy’s Update

Macy’s Update: HOLD

+ Still strong cash flows although weaker. Last year’s initiatives seem to be working.
– Near-term outlook is getting cloudier. Dividend yield is 3.8%.

Q1/2016: Sales were 7.4% below last year’s sales due to both stores closed in 2015 and the decline in comp sales. The number of transactions declined 7% in the quarter. The sales negatively impacted by reduced spending by international tourists. Other factors: warmer-than-normal weather and fashion trends.
It has a good quarter for such businesses as fine jewelry, dresses, active, fragrances, coats, men’s tailored clothing, housewares, and furniture. However, the softer businesses includes handbags, fashion watches, women’s shoes, kids, men’s furnishings, and luggage. These segments represent a higher percentage of total sales, which negatively affected the top line for the quarter.

Good signs: Digital sales continued strong, still growing double digits. This year, it ranks 6th largest online retailer in America. The company has planned to invest strongly on this segment. Gross margin in the first quarter was 39.1%, which is up 10 basis points from last year’s level. The company bought back $129 million of stock or 3 million shares under its repurchase program versus $385 million last year.

Solution: The company would excite customers with greater newness and more exclusive merchandise. In addition, it will take steps to reduce expenses and invest in online business. Most of these actions are expected to have a bigger impact in the fall and particularly in the fourth quarter. It expects that the gross margin rate for the full year will be approximately flat to last year. Second quarter’s margin is expected to be low due to slow sales of high-margin warm weather merchandise (last year’s weather factor).

For the industry tendency: Given recent news, consumers seem to be okay. Employment is steady and wages continue to rise. More normal weather (winter) will help sales in 4th and 1st quarters. Concern: spending has shifted from apparel to other categories. We’ll look at data on this tendency closely.

Note: In the past ninety (90) days, Camarda may have purchased or sold Macy’s for its clients’ accounts. It may hold Macy’s presently in its clients’ accounts and may, in the future, continue to purchase or sell Macy’s without further communication(s) updating its investment bias.

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