On Monday, Evercore ISI adjusted its stance on Macy's (NYSE:M) shares, reducing the price target to $17 from the previous $22, while keeping an In Line rating on the stock. The firm's analysis suggests that the initial boost in valuation following activist interest is now waning, as market share losses for the retailer have quickened.
According to Evercore ISI's industry model, Macy's has seen an acceleration in market share decline, losing 110 basis points compared to 2019 in the first quarter of 2024, a deterioration from the 90 basis points loss in the fourth quarter of 2023. This has occurred despite the strong performance of Macy's "First 50" stores.
The firm's projections for Macy's in 2024 include an EBIT margin of only 5%, which is comprised of gross margins that are more than 100 basis points above 2019 levels. Selling, General and Administrative (SG&A) expenses per square foot are also reported to be 1% below 2019 levels, contrasting with increases at other retailers such as TJX (NYSE:TJX), Target (NYSE:TGT), and Walmart (NYSE:WMT), which have seen their SG&A expenses per square foot rise significantly above 2019 levels.
Evercore ISI acknowledged that Macy's management is concentrating on the appropriate areas amid challenging conditions for department stores. However, without the potential of a takeover bid, which previously elevated the stock's valuation, the firm anticipates Macy's shares to return to pre-deal multiples. Macy's traded at approximately 5 times next twelve months' (NTM) P/E in the six months before the deal announcement.
The reassessment of Macy's target price to $17 is based on around 5.5 times the firm's estimated 2025 earnings per share (EPS) of $3.00. This represents a decrease from the earlier target price of $22, which was based on 8 times the estimated 2025 EPS and factored in the potential of a takeover bid.
In other recent news, Macy's has seen several significant developments. The company reported strong Q1 results, with net sales of $4.8 billion and an adjusted EPS of $0.27, surpassing its forecast. Consequently, Macy's raised its EPS guidance for fiscal year 2024 to a range of $2.55 to $2.90, an increase of 3% at the midpoint. However, the gross margin forecast for the fiscal year was adjusted downward, reflecting a more conservative expectation for profit margins.
Macy's also announced the appointment of Keith Credendino as the new Chief Information Officer (CIO), who will join Macy's Corporate Strategy Group after the retirement of Laura Miller. Credendino's previous contributions to the company include improving in-store and online customer experiences, launching digital marketplaces, and spearheading the modernization of checkout processes.
Investment firms Arkhouse Management and Brigade Capital Management have increased their takeover offer for Macy's to approximately $6.9 billion, reflecting their continued interest in acquiring the retailer. In response to these recent developments, analyst firms have offered mixed views. TD Cowen raised its price target for Macy's shares to $21.00, while UBS maintained its Sell rating with a steady price target of $10.00. Additionally, JPMorgan (NYSE:JPM) increased its price target to $27.00, maintaining an Overweight rating.
InvestingPro Insights
As Evercore ISI revises its outlook on Macy's, real-time data from InvestingPro provides a nuanced view of the retailer's financial health and market position. Macy's is currently trading at a high earnings multiple with a P/E ratio of 381.82, which is significantly above the industry average, indicating a premium valuation of the company's earnings potential. However, when adjusted for the last twelve months as of Q1 2025, the P/E ratio normalizes to 5.85, aligning with Evercore ISI's use of a multiple around 5.5 times its estimated 2025 EPS for Macy's target price assessment.
One notable InvestingPro Tip highlights Macy's as a prominent player in the Broadline Retail industry, which may provide some stability despite the accelerated market share decline reported by Evercore ISI. Additionally, Macy's has demonstrated a commitment to its shareholders by maintaining dividend payments for 22 consecutive years, with a current dividend yield of 3.64% as of 2024. This could be an attractive feature for income-focused investors, especially when compared to the current volatility in the retail sector.
For those looking to delve deeper into Macy's financials and future prospects, InvestingPro offers additional tips and metrics. Readers can use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, providing access to comprehensive analysis and insights that could shape investment decisions. With a total of 7 additional InvestingPro Tips available, users can gain a more detailed understanding of Macy's position in the market.
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