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What Is Wrong at Macy's?

Macy's (NYSE: M), the largest department store in the United States, has struggled in recent years because of global trade pressure and an overall decline in the retail industry. Macy's stock has dropped 50% in 2019, and current levels near $15 per share are down significantly from the $40 high reached in August 2018. Valuation has dropped from $8 billion in 2018 to $4.8 billion today.

Macy's business has faced serious trouble from online competition. Many store closures are expected in coming years, meaning less revenue going forward. Concerns related to the ongoing U.S.-China trade war cannot be ignored; the company has been working to move its private-label product manufacturing out of China, but consumers are likely to see prices go up if tariffs are placed on all Chinese goods. Macy's vs S&P from January 2019 to today

Image Source: YCharts.

Low second-quarter earnings

Macy's second-quarter earnings fell below analyst expectations, and profits took a huge hit. Heavy markdowns were required to clear inventory, and sales only increased by 0.2% from the previous year. As mentioned, the death of brick-and-mortar retail has hit Macy's hard; the company has closed hundreds of stores and cut thousands of jobs as consumers continue their switch to online shopping. An uncertain macroeconomic environment and a short holiday season (which will drag on retail sales) also present challenges.

The company's sales and administrative expenses are high and growing, having increased 0.6% year over year, to $2.2 billion, in the second quarter (39.3% of net sales). Continued increases in these expenses in coming months may hurt margins and profitability.

Management mentioned increasing levels of inventory as a major challenge, in addition to a fashion miss in its women's sportswear brands. The company also faced slow sales of warm-weather apparel and a significant decline in international tourism.

High debt

Macy's has a real debt problem. Its outstanding debt in August 2019 was $4.7 billion, with $674 million in cash on the balance sheet. The amount due just within the next year stood at $4.44 billion; to offset this, Macy's has the aforementioned cash, plus has $240 million in receivables due in one year. That means its outstanding debts are worth $13.5 billion more than its cash and receivables. Earnings before interest and taxes fell 21% in the past year, and if this continues, the company will have difficulty paying off debt. Thanks to the decline in its price, the stock has a dividend yield of 9.7%, but it has not been able to attract investors.

Downgraded credit rating

Macy's problems are unlikely to end soon; sales and earnings will continue to decline in 2020, and Credit Suisse recently downgraded the stock to "underperform" from "neutral" and lowered the target price from $19 to $12. Despite its low valuation, Macy's does not look attractive as an investment right now. Its weak outlook means it's best avoided.

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Vandita Jadeja has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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