M Macy's

Sector financial performance:

This company, who primarily sells merchandise and services including apparel and footwear, accessories, jewelry, beauty products, home furnishings and large appliances through its department stores and website, has been grouped into department stores sector in merchandise-clothing, household& furnishing, personal care industry.

All companies in this sector in our analysis have experienced decreased comparable stores sales (physical stores) between 2016 and the first half of 2017. Based on our data, the average growths of comparable sales (including online sales) are 0%, -2.3%, and 0.6% for 2017, 2016 and 2015 respectively. While the decrease in their comparable stores sales has been offset, to some extent, by the significant increase in comparable online sales, because the sales from e-commerce only account for a relative small portion compared with stores sales, the net sales for most companies have decreased during the same period.

However, it seems the decline in comparable sales hits a bottom in the second half of 2017 and made a turn to grow again since then driven faster growth in online sales, slower decline in transactions, and rebounding price/less markdowns. Our data indicates that average comparable sales had no changes in 2017 and gained about 2% in 2018 so far.

Under the pressure from decreasing traffic and sales, companies have to use aggressive promotion and as well shut down more inefficient stores. The resulted markdowns seems, as indicated by the decrease of about 100 basis points in gross margins of companies in the past three years, hurt companies’ profitability. The average gross margin in the first half of 2017 was  about 33.5% with a range in 30-39%. (33%- occupancy cost included and 34% -occupancy costs excluded).  At the same time, the average SG&A as percentage of sales (average 28% with a range 24-32%) decreased about 40 basis points du ring the same period due to deleverage of decreased sales. Therefore, we see the average operating margin went down to about 5.5% from about 7% of 2014 with a range of 2-7% (12 months trailing data, ended 20170731). The operating margin seems to have no change in the past year since the improved gross margin/rising price has been offset by increasing shipping expenses of online sales. However, we have seen solid growth in EBI in the past year and its huge potentials as continuously improving same store sales.

According to our analysis, the current companies’ enterprise price/EBI ratios vary between 13and 22 with an average 16.

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Company performance:

The net sales have kept going down straight between 2015 and 2017 as its comparable stores sales went down. It seems that the decline in sales slowed down in the last quarter of 2017 and presented increase of about 2% for the first half of 2018.

The first half of fiscal 2018 compared with 2017(20180804)

Net sales increased about 1.1% (down 1.1% for 2Q) primarily due to increase in comparable stores sales of about 1.9% (flat for 2Q).

The fiscal 2017 compared with 2016

Net sales decreased about 3.7% primarily due to decrease in comparable stores sales of about 2.2%.

 The first 26 weeks of fiscal 2017 compared with the same period of 2016

Net sales decreased about 6.4% primarily due to decrease in comparable stores sales of about 4%.

Fiscal 2016 compared with 2015

Net sales decreased about 4.8% primarily due to the decrease of 3.5% in comparable stores sales.

Fiscal 2015 compared with 2014

Net sales decreased about 3.7% primarily due to decrease in comparable stores sales of about 3%.

Its gross margin (excluding distribution and occupancy costs) has decreased by about 60 basis points since 2014 to about 39.4% of fiscal 2018(trailing 12 months) as a result of increasing promotion and markdowns activities. As SG&A as percentage of sales increase by about 240 basis points probably as a result of decreased sales, this company’s operating margin went down to 6.7% in 2018. But its EBI/share increased (about 15% annually) in the first half of 2018 probably as a result of increase in sales and margins.

Stock price

This stock currently has an enterprise price/EBI ratio of 15 ($36). We think that its stock is being relatively overvalued considering the uncertainty and sustainability of its growth in comparable sale, which may have been driven by rising price.