Macy’s Inc. (NYSE: M) stock has found its stride in the past six month, gaining 50 percent on the strength of a better-than-feared holiday shopping season. However, Morgan Stanley downgraded Macy’s stock on Thursday and said the business may not be doing as well as it seems.
Morgan Stanley analyst Kimberly Greenberger says Macy’s declining same-store sales and deteriorating return on invested capital (ROIC) are red flags for investors, and the stock’s recent outperformance has created an opportunity to take some profits off the table.
Greenberger says Macy’s ROIC dropped 4.3 percent from 2014 to 2016 and continued to decline throughout the first three quarters of 2017. That trend changed in the fourth quarter thanks to real estate gains, an improvement in the broad retail market and tax reform, but Greenberger says these trends are likely temporary and don’t change the underlying weakness in Macy’s business.
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“We expect ROIC to deteriorate in 2018 after 1Q and thus expect the stock price to decline once again,” Greenberger says.
Greenberger says real estate gains and Macy’s increasing reliance on private label credit card income have helped mask declines in core retail earnings, which are now down 63 percent since 2014.
Macy’s has been trying to streamline its business and improve its efficiency by closing stores, but Greenberger says Macy’s hasn’t been aggressive enough in trimming the fat. Macy’s has reduced its number of locations by 14 percent since 2014, but same-store sales in 2017 still declined 4.3 percent.
Morgan Stanley is expecting ROIC declines to continue for Macy’s in 2018 and 2019.
“Considering change in ROIC exhibits [an approximate] 70 percent correlation to [enterprise multiple], our forecast for continued negative store comps and declining ROIC further skews stock price risk to the downside,” Greenberger says.
Morningstar analyst John Brick says Macy’s is doing everything it can to fend off a changing retail environment, but the shift will ultimately take its toll on business.
“In the long run, we think the overcrowded competitive landscape, continued decline of department store market share to online and off-price, and shift of share of wallet to other categories will continue to pressure top-line growth and merchandise margins,” Brick says.
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Morgan Stanley has downgraded Macy’s to “underweight” and has lowered its price target for M stock from $27 to $25. Morningstar has an “overvalued” rating and $29 fair value estimate for Macy’s stock.
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Macy’s Inc (M) Stock Downgraded on Core Business Concerns originally appeared on usnews.com
