Company overview - Macy's, Inc. is an omnichannel retail company operating stores, Websites and mobile applications under various brands, such as Macy's, Bloomingdale's and Bluemercury. The Company sells a range of merchandise, including apparel and accessories (men's, women's and children's), cosmetics, home furnishings and other consumer goods. Its subsidiaries provide various support functions to its retail operations. Its bank subsidiary, FDS Bank, provides credit processing, certain collections, customer service and credit marketing services in respect of all credit card accounts that are owned either by Department Stores National Bank (DSNB), which is a subsidiary of Citibank N.A., or FDS Bank. The private label brands offered by the Company include Alfani, American Rag, Aqua, Bar III, Belgique, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, Greg Norman for Tasso Elba, Holiday Lane, Home Design, Hotel Collection, John Ashford, Karen Scott, Thalia Sodi and lune+aster.


M Details

Sales impacted by general consumer spending levels: Macy's Inc (NYQ:M) has reported 7.5% yoy decline in net sales for Q1FY17 to $5.3 billion compared to the first quarter of 2016, due to fiscal year-end 2016 store closures and the decline in comparable sales. The decline in comparable sales on an owned basis was 5.2% yoy, while the decrease in comparable sales on an owned plus licensed basis for Q1FY17 was 4.6%. However, sales during the quarter were strongest in women's apparel, particularly active and dresses, fine jewelry, fragrances, women's shoes, furniture and mattresses, while it was subdued in handbags, fashion jewelry and fashion watches, housewares and tabletop. The Company’s digital business continued its robust growth with double digit gains at both macys.com and bloomingdales.com. Overall, the Company's operations were impacted by general consumer spending levels, including the impact of general economic conditions, consumer disposable income levels, cost and level of consumer debt, and the costs of necessities. In the first quarter, the Company opened new Macy’s stores in Murray, UT and Los Angeles, CA as well as one Bloomingdale’s store in Kuwait under a license agreement with Al Tayer Group. Further, the Company expects to open new Macy's and Bloomingdale's stores in Al Maryah Central in Abu Dhabi, UAE, in fiscal 2018 under a license agreement with Al Tayer Group and two additional Bloomingdale's stores in San Jose, CA and Norwalk, CT in fiscal 2019.


Q1FY17 financial summary; (Source:  Company reports)

Strategic Alliance with Brookfield:  In January 2017, the Company finalized the formation of a strategic alliance with Brookfield Asset Management to create increased value in its real estate portfolio. Under the alliance, Brookfield has an exclusive right for up to 24 months to create a “pre-development plan” for each of approximately 50 Macy’s real estate assets, with an option for Macy’s to continue to identify and add assets into the alliance. The breadth of opportunity within the portfolio ranges from the additional development on a portion of an asset (such as a Company controlled land parcel adjacent to a store) to the complete redevelopment of an existing store. Once a "pre-development plan" is created, the Company has the option to accept the pre-development plan and then either contribute the asset into a joint venture for the development plan to commence or sell the asset to Brookfield. If the Company chooses to contribute the asset into a joint venture, the Company may elect to participate as a funding or non-funding partner. After development, the joint venture may sell the asset and distribute proceeds accordingly.

Monetization and redevelopment of assets:  In February 2017, the Company sold its downtown Minneapolis store and parking facility for $59 million of proceeds and recognized a gain of approximately $47 million in the first quarter of 2017. In April 2017, the Company launched a marketing effort for the upper floors of its flagship State Street Macy's store in downtown Chicago. Development and increased utilization of the upper floors are expected to drive more foot traffic to the store. In May 2017, the Company signed a contract to sell an additional two floors of the downtown Seattle Macy's store (four floors were sold in a similar transaction in 2015). This transaction is expected to close in the Fall of 2017. The company is exploring white space where Macy’s can credibly fill an unmet need, whether through physical or digital concepts, brand partnerships, or acquisitions.  Since 2015, it has reduced annual expense by over $1.5 billion, with roughly a third reinvested in growth strategies. The company continues to find ways to operate more effectively and efficiently, while looking for ways of being more efficient with uses of cash.


Peer comparison; (Source:  Company reports)
 
Focusing on accelerating the growth of its luxury products:  The Company is focusing on accelerating the growth of its luxury beauty products and spa retailer, bluemercury, by opening additional freestanding bluemercury stores in urban and suburban markets, enhancing its online capabilities and adding bluemercury products and boutiques to Macy's stores. 10 new freestanding bluemercury locations were opened in the first quarter of 2017 and 20 additional locations are expected to open later in the fiscal year. As of April 29, 2017, the Company is operating 131 bluemercury locations (111 freestanding and 20 inside Macy's stores). The Company's operations are impacted by competitive pressures from department stores, off-price stores, specialty stores, mass merchandisers, online retailers and all other retail channels.


Exclusive Assortment; (Source:  Company reports)
 
Significant cash flows with a strong balance sheet: Net cash provided by operating activities was $234 million in the first quarter of 2017, compared with $8 million in the first quarter last year. Net cash used by investing activities in the first quarter of 2017 was $60 million, compared with $211 million a year ago. Net cash used by financing activities in the first quarter of 2017 was $270 million, compared with $172 million last year. The company repurchased approximately $146 million face value of senior notes and debentures in the first quarter of 2017. The debt repurchases were made in the open market for a total cost of approximately $149 million, including expenses related to the transactions. As a result of the debt repurchases, Macy's, Inc. booked $3 million in premium and fees ($2 million after tax, or 1 cent per diluted share) in the first quarter of 2017.


Asset Sale Proceeds; (Source:  Company reports)
 
FY16: During FY16, total sales declined by 4.8% yoy to $25.778 billion, and on owned basis comparable sales were down 3.5%. Comparable sales on an owned plus licensed basis declined by 2.9%.  Earnings per stood at $1.99, while excluding impairments, store closing, settlement charges and other costs of $577 million ($349 million after tax or $1.12 per diluted share), the same on an adjusted basis was $3.11. In FY16, the company opened 27 stores and closed 66 stores. New stores opened in fiscal 2016 included one Macy’s store in Kapolei, HI, 24 Bluemercury freestanding stores, one Macy’s Backstage freestanding store in San Antonio, TX, and one Bloomingdale’s Outlet in Orange, CA. Net cash provided by operating activities stood at $1.801 billion in FY16, compared with $1.984 billion in FY15, while net cash used by investing activities stood at $187 million, compared with $1.092 billion in FY15. Operating cash flows net of investing stood at $1.614 billion for FY16, compared with $892 million in FY15.


FY16 Financial summary; (Source:  Company reports)

FY17 Outlook: The Company expects comparable sales on an owned basis to decline 2.2-3.3%, while comparable sales on an owned plus licensed basis to decline 2-3%. Total sales are expected to be down between 3.2% and 4.3% Further, company expects adjusted diluted earnings per share of $3.37-$3.62, excluding the impact of the anticipated settlement charges related to the company’s defined benefit plans and premiums and fees associated with debt repurchases. Excluding the impact of the anticipated fourth quarter gain on the sale of the Union Square Men’s building in San Francisco, the anticipated settlement charges related to the company’s defined benefit plans and premiums and fees associated with debt repurchases, the company estimates earnings per share of $2.90 to $3.15 for FY17.


FY17 sales guidance; (Source:  Company reports)

Stock Performance: The shares of Macy have declined 33.7% in the last one year in line with the other retail stocks, owing to poor consumer spending, coupled with intensifying competition in the sector due to expansion of eCommerce players. However, Macy’s is a profitable company with significant cash flows, and real estate assets. Moreover, the company has a decent dividend yield of 6.6%, and we believe that the near-term developments are incorporated in the current price. Given the on-going investments in expansion of its new stores, and potential to unlock a value of its real estate assets, we give a “Buy” recommendation on the stock at the current market price of $22.99


M Daily chart; (Source: Thomson Reuters)

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