Macy’s Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Macy’s, Inc. operates as a large omnichannel retailer, offering a variety of merchandise, including apparel, accessories, cosmetics, and home goods. The company operates primarily through its website, mobile application and stores and is undergoing a large transformation to adapt to the changing consumer behavior.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Macy’s operates primarily as an omnichannel retailer, using a blend of brick-and-mortar stores, a website, and a mobile application to reach customers. This model has been increasingly challenging for traditional retailers as they adapt to e-commerce and changing consumer behavior.

Business Overview:

  • Revenues Distribution: Macy’s generates revenue primarily from sales of merchandise. The revenue is split among its various brands, including Macy’s, Bloomingdale’s, and Bluemercury. While it had a strong emphasis on brick-and-mortar in the past, it has been pivoting towards a more omnichannel approach and has invested in e-commerce capabilities.

Macy’s, Inc. operates through its omnichannel ecosystem, encompassing well-known brands such as Macy’s, Bloomingdale’s, and Bluemercury. These brands cater to diverse customer segments across the spectrum of apparel, accessories, cosmetics, and home goods.

  • Trends in the Industry: The retail sector, particularly department stores, is facing major disruptions:
    • The shift from brick-and-mortar to online sales, accelerated by the COVID-19 pandemic, has significantly impacted traditional retailers.
    • Consumers are increasingly favoring e-commerce and are demanding a seamless omnichannel experience.
    • Fast-fashion brands and discount retailers are also putting pressure on companies.
    • Supply chain disruptions, along with increased inflation, have impacted costs and pricing.
  • Margins: Macy’s has experienced pressure on its margins. Gross margins have decreased slightly over time due to competition and a shift in promotional activity.
  • Competitive Landscape: Macy’s faces stiff competition from various sources:
    • Online retailers, such as Amazon and other e-commerce pure plays.
    • Off-price retailers such as TJ Maxx and Ross, offering branded merchandise at discount prices.
    • Large department stores, including Kohl’s, Dillard’s, and Nordstrom.
    • Specialized retailers, that offer products similar to what Macy’s offers.
  • What Makes Macy’s Different?
    • While Macy’s is implementing a new strategy, some points of differentiation and potential strength are it’s various brands with good presence in malls, shopping centers and online
    • It’s trying to create a new luxury experience with Bloomigdale’s and Bluemercury and this could improve profitability.
    • Its focus on digital platform should help them to engage with the younger audience, but it is still not clear that this would increase value in the near future.

Financials in Detail:

Analyzing Macy’s financials reveals a complex picture with a mix of positives and headwinds. Here’s a breakdown:

  • Profitability Metrics: While revenue has remained relatively stable, profitability has been impacted by declining gross margins, higher promotion spending and costs. The company is aiming to fix this through its “A New Day” strategy.
  • Revenue Trends: Revenues have been volatile, reflecting the challenges of a dynamic retail market. Though there has been a slight increase in revenue.
  • Inventory Management: Inventory management has been a key challenge, with the company needing to balance inventory levels to avoid markdowns and ensure sufficient supply.
  • Free Cash Flow (FCF): Macy’s generates positive FCF, due primarily to the proceeds from its credit card program, but they still had negative cash flow from operating activities in the first quarter of 2024. It has also made some changes in capex to reduce it. This is important because it means that even though the business is struggling, it still has a good cash-generating profile, but the question is that is this sustainable long-term.
  • Capital Allocation: Management aims for 35-45% of excess cash to be given to shareholders in the form of share buybacks and dividends and for remainder, new investments are being made for growth (e-commerce & better supply chain). It’s also targeting long-term debt to decrease.
  • Debt Structure: Macy’s has a reasonable debt structure and has taken steps to refinance their debt at low interest rates and long maturities. Still it’s interest expense is around 10% of their revenue, which is a lot.

Macy’s overall revenue has seen a slight increase YoY (from $4.689 billion to $4.857 billion), however, there are some key issues to consider. The gross margin rate is down by 70 basis points (39.3% to 38.6%), and the gross margin in dollar terms is up by 3.5% YOY, while SG&A expense is up by 1.3% YOY. In general, the expenses are pretty similar to last year, however, due to the drop in gross margin, there is a significant drop in net income YOY (from $100 million to $29 million). They have continued their focus on inventories and operating efficiency, but it looks like they still have a long way to go before they show better profitability.

Moat Analysis:

Rating: 2/5

  • Intangible Assets: While Macy’s has some brand recognition, particularly with its department stores, these brands have lost some of their allure and relevance among younger consumers, making this a weak moat source. Its recent attempt to add new popular brands to its merchandise shows this is indeed a weak moat.
  • Switching Costs: There are almost no switching costs for consumers, who can easily find substitutes online and in other retail stores, therefore, no moat from this approach.
  • Network Effects: There are no network effects that benefit Macy’s. The business is not a network.
  • Cost Advantages: Macy’s does not have strong cost advantages over other competitors, in fact, its costs are higher than some retailers. Their restructuring efforts to decrease costs, along with an improved supply chain, are important for them to remain profitable, but this doesn’t give them a moat.

Legitimate Risks:

  • Competition: Intense competition from both online and offline retailers, as well as from fast fashion and discount retailers, will keep margins under pressure.
  • Economic Downturn: Economic downturns could significantly impact consumer spending and therefore revenues of Macy’s.
  • Supply Chain Disruptions: Global supply chain issues and increased costs due to inflation remain significant.
  • Changing Consumer Preferences: Failing to adapt to changing consumer tastes and preferences could cause revenue to decline.
  • Failure of Omnichannel Strategy: If the omnichannel strategy is not executed well and if customers don’t want it, the company may fall behind the competition.

Business Resilience:

While Macy’s faces several challenges, it has a long operating history and has been able to evolve in many decades in the past. The company’s diversified brand portfolio can provide a buffer against losses in individual business segments. It’s also taking steps to reduce costs and increase margins, through its new strategy, and that can be beneficial, if implemented correctly. There is good brand recognition for Macys in older demographics.

Understandability:

Rating: 2 / 5 Macy’s operations as a retailer are easy to grasp. However, the company’s new strategies, transformation efforts, and integration of its brick-and-mortar and online operations makes the business more complicated to understand. The complex financials can also make it tough to grasp for new investors.

Balance Sheet Health:

Rating: 3 / 5 Macy’s has a moderate balance sheet. While its debt is not very high at a current ratio of 0.88, its current assets are greater than current liabilities which is a positive. It has a reasonable debt structure, and is taking steps to streamline its costs, while also reducing its long-term debt, which helps it with financial stability.

It is very difficult to establish if Macy’s can create a true moat. They face strong headwinds from competitors in all parts of the value chain. Their strategy of transformation remains uncertain, but if executed correctly, it could help with some of the problems they are facing. It’s important to monitor their upcoming earnings to understand if the new strategies are having an impact.