Shares of the discretionary offerings giant Macy's (NYSE: M) are sliding by as much as 15.2% in the pre-market hours of Thursday morning, as the company released its first quarter 2023 earnings results, culminating in a breakout of investor concerns over what was shown. Despite the company being an entrenched brand in the American consumer arsenal of shopping choices and carrying a diversity of tiers and products via Bloomingdale's, Bluemercury, and others, the forces of a broader industry cycle bypassed any moat that the business was able to put up.
Companies like Best Buy (NYSE: BBY) also had a significant slowdown in the past twelve months, as reflected in contractions within comparable sales and net earnings. It would seem that Dick's Sporting Goods (NYSE: DKS) is the only operator immune to the broader headwinds affecting every other name in the discretionary space. However adverse these initial reports may seem for Macy's, dire situations like these present management with the opportunity to step up into creative solutions to alternative sales channels and business models; perhaps this possibility has helped Macy's stock overtake competitors like Kohl's (NYSE: KSS) by nearly 10% over the past twelve months.
Cheap for a Reason?
Macy's stock is now trading at a discount to its book value, valued at 0.9x, to be precise. Excluding the sell-offs during the COVID-19 pandemic, the company has not sold at these valuations since the aftermath of the 2008 financial crisis. On a similar note, the company's 3.2x price-to-earnings ratio is the lowest since 2009 (ex., COVID-19 sell-offs); of course, this is an entirely different company in a completely different sector than what it was a decade ago. However, there should still be some value to be realized.
Heading the company's quarterly earnings press release, investors will read a 7% decline in net sales relative to a year ago, with a deeper contraction shown in the comparable sales rate of decline of 7.9%. The comparable sales rate of growth and decline is a significant indicator that analysts and investors lean on to measure the health of the retail sector, as it cleanses data from any artificial development derived from opening new locations. As the company sees its active customer base decrease, a value proposition and monetization strategy is called for.
There are only a few metrics investors have to celebrate, such as the beat on gross margins, as they rose to end the quarter at 40%. The board of directors has also approved a dividend program, which will raise the payout to $0.1654 per share, a 5% increase from the previous year's payout of $0.1575 to at least keep on the heels of inflation. Moreover, management has taken the viewpoint on the stock being cheap, as they repurchased up to 13.1 million shares during the year and approved a further $25 million to be allocated toward additional buybacks throughout 2023.
Pivots in the Making
Monetization of the current active customer base is a must, as well as capitalizing on campaigns to attract an even larger base in the future. The company's digital sales channel performance may act as a beacon of hope, aside Macy's dividend yield of 4.65% to cushion any volatility expected during the challenging restructuring periods. Macy's digital sales channel saw 467 million visits, and carried a 3.73% conversion rate, signaling much work to be done in terms of delivering a proper value proposition to these visitors. Further, 1.4 million users downloaded the Macy's app on their smartphones, another venue where value could be given to increase conversion.
As digital sales now represent a third of the company's net sales, it differs from what segment management wants to let run by. As management guidance tables provided within the quarterly presentation show, the full fiscal year 2023 outlooks need a reshuffle. With sales expected to decline by a further 6% to 7.5% and the recently achieved 40% gross margin to fall back to 38%, it would seem that a refreshed business model is called for. Expanding on digital - rather than brick-and-mortar - sales would effectively allow the company to scale in volume terms and margins.
Macy's analyst ratings suggest that there is a 75% upside potential from today's prices, scenarios which may be pricing in a specific improvement in industry standards as well as internal operating procedures at Macy's; on a technical basis, Macy's chart will show the stock has retraced to a Fibonacci 'golden ratio' between the 61% and 78.6% retracements, measured from the past three-year trough to peak pattern. Buybacks, dividends, and favorable valuation multiples could act as enough margin of safety for investors to consider exposure to a turnaround play in the making.
