Bold New Chapter Strategy Leverages Bloomingdale's And Bluemercury For Growth

Key Takeaways

• The Bold New Chapter strategy focuses on customer satisfaction and luxury growth, potentially boosting revenues through enhanced experiences and higher-margin products.
  
• Streamlining operations by closing underperforming stores and focusing on digital transformation could improve margins, drive revenue growth, and fund future investments.
  
• Potential weaknesses in internal controls, store closures, climate impact, reliance on promotions, and strategic investments could pressure Macy's revenue and profitability.

Catalysts

An omni-channel retail organization, operates stores, websites, and mobile applications in the United States.

• Macy's focus on its Bold New Chapter strategy, including enhancing customer experience at First 50 locations and 100 pilot stores, is expected to improve customer satisfaction and sales, potentially boosting future revenues.
  
• The company aims to accelerate growth in the luxury segment through its Bloomingdale's and Bluemercury brands, which have seen positive sales trends; this could increase revenues and profitability due to higher margins on luxury goods.
  
• The closure of underperforming and less profitable store locations is projected to streamline operations and improve net margins by focusing on more profitable stores and locations.
  
• Investments in digital transformation and improvements in online shopping experiences and fulfillment capabilities are anticipated to enhance the digital sales channel, potentially driving higher revenues and reducing fulfillment costs.
  
• Macy's real estate monetization efforts, which are expected to generate significant capital, could fund further growth investments and strengthen the balance sheet, potentially enhancing future earnings.

Macy's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Macy's's revenue will decrease by -5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $872.2 million (and earnings per share of $3.31) by about December 2027, up from $172.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.9x on those 2027 earnings, down from 27.0x today. This future PE is lower than the current PE for the US Multiline Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to decline by 1.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.59%, as per the Simply Wall St company report.

Macy's Future Earnings Per Share Growth

Risks

• The independent investigation into erroneous accounting entries related to delivery expenses indicates potential weaknesses in internal controls, which could impact trust and future earnings.
  
• The closure of approximately 65 locations may result in lost revenue that may not be fully offset by online sales or sales transfer to other nearby locations.
  
• The impacts of unseasonably warm weather on cold weather product sales highlight Macy’s vulnerability to external climate factors, potentially affecting revenue.
  
• Dependency on promotions and markdowns to drive sales amid a competitive retail environment could erode gross margins, impacting profitability.
  
• Investments needed to improve customer experience in the First 50 and other strategic initiatives may increase SG&A expenses without guaranteed revenue and margin improvement.

Valuation

• The analysts have a consensus price target of $17.36 for Macy's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $9.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $19.5 billion, earnings will come to $872.2 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 9.6%.
• Given the current share price of $16.73, the analyst's price target of $17.36 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.