Supply Chain Improvements And Private Brands Expansion Will Elevate Shopping Experience

Key Takeaways

• Macy's strategy to enhance thriving locations and modernize operations could boost revenue, reduce costs, and improve margins.
  
• Investments in merchandising and capital allocation, including share buybacks, may drive higher sales, EPS growth, and shareholder value.
  
• Economic pressures and necessary investments may challenge Macy's margins, with uneven sales performance potentially affecting revenue stability.

Catalysts

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

• Macy's Bold New Chapter strategy focuses on reallocating resources from underperforming stores to enhance thriving locations and invigorate the customer experience, potentially boosting revenue through improved sales performance at both physical and digital Macy's, Bloomingdale's, and Bluemercury.
  
• The company is actively closing underperforming stores and reallocating funds to more lucrative locations while monetizing assets, which could enhance net margins by focusing on highly productive stores and reducing expense liabilities.
  
• Investments in merchandising, especially in expanding successful private brands and relevant national brands, aim to improve product assortments and potentially drive higher sales and enhance profit margins.
  
• The ongoing investment in modernizing operations, such as improvements in supply chain efficiency, aims to shorten delivery times and improve inventory management, which could lower operational costs and improve net margins.
  
• Macy's intention to continue share buybacks and optimize capital allocation could significantly drive earnings per share (EPS) growth while ensuring solid free cash flow, benefiting overall shareholder value.

Macy's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Macy's's revenue will decrease by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $836.1 million (and earnings per share of $3.19) by about March 2028, up from $582.0 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 7.0x on those 2028 earnings, up from 6.7x today. This future PE is lower than the current PE for the US Multiline Retail industry at 16.6x.
• Analysts expect the number of shares outstanding to grow by 1.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.39%, as per the Simply Wall St company report.

Macy's Future Earnings Per Share Growth

Risks

• The anticipated store closures in 2025 may negatively impact revenue, as these closures contributed to approximately $700 million in net sales the previous year.
  
• Continued pressure on consumer spending and economic uncertainties could suppress same-store sales growth and adversely affect revenue.
  
• Macy's ongoing need to invest in store improvements and customer experience could lead to increased SG&A expenses, impacting net margins if not offset by top-line growth.
  
• Adverse external factors, such as tariff changes and inflationary pressures, may challenge Macy's ability to maintain favorable gross margins, potentially affecting overall earnings.
  
• Limitations in scaling the improvements seen in certain store locations across all stores could result in uneven sales performance, impacting overall revenue stability and growth.

Valuation

• The analysts have a consensus price target of $15.182 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 $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.5 billion, earnings will come to $836.1 million, and it would be trading on a PE ratio of 7.0x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of $14.06, the analyst price target of $15.18 is 7.4% 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.