Macy's Inc (NYSE:M) Has Significant Downside Potential

November 15, 2017, 14:06 pm ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Macy's Inc (NYSE:M) recently reported its Q3 earnings where the actual EPS beat analysts’ expectations leading to a significant rally in the retailer’s stock price. However, many analysts believe that the stock has more downside potential due to the many headwinds that the retailer is facing.

Article Summary

Macy’s Q3 earnings per share beat expectations triggering a brief rally.

Most analysts believe the stock has significant downside potential.

The company could unlock massive value from its real estate holdings.

Here’s the trading report on Macy’s.

The Q3 report indicated that the retailer missed its revenue targets by about $30 million, which was largely attributed to decreased sales. This was the eleventh consecutive quarter where the retailer reported declining sales, yet there is no evidence that this trend will change in the near future.

The company is also facing higher restructuring costs reported at $33 million, which is much higher than the initial estimate of $20-$25 million. The company is being forced to close some of its stores in the US as retail locations in the US suffer from declining foot traffic due to the rise of online retailers led by Amazon.com, Inc. (NASDAQ:AMZN).

Although Macy’s is not the worst performing retailer, this position is held by Sears Holdings Corp (NASDAQ:SHLD), Macy’s is likely to continue reporting declining sales for the foreseeable future. The main difference between Sears and Macy’s is that the latter is well managed as compared to Sears, which is poorly managed.

The company reported increased profitability in the third quarter, which allowed it to beat earnings per share estimates, but the higher profits were occasioned by the sales on non-recurring items such as real estate. Overall, Macy’s operating income was much lower as compared to a similar period in the previous year; the company’s operating income in Q3 2016 was $128 million, while it could have been $111 million in Q3 2017.  

Macy’s has large real estate holdings, which could be the key to the company’s future profitability. The retailer generated about $176 million from the sales of some of its real estate holdings in the last quarter and is on track to generate an additional $275-$300 million from its real estate holdings in 2017.

The company’s CEO, Jeff Gennette, reiterated his confidence that the retailer would have a stellar fourth quarter due to the holiday shopping season as Macy’s is a top gifting destination. The company also maintained its forward annual guidance, which indicates that all is not lost, given that many retailers are downgrading their forward guidance and reporting bigger declines in sales and revenues.

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