Store closings will help boost profitability, but department stores remain a sector in secular decline.
comparable sales remained in negative territory during the second quarter, the 2% decline was a notable improvement from first quarter’s almost 6% decline. Furthermore, the announcement of intentions to close an additional 100 stores (14% of Macy’s store base) reassured investors that Macy’s management remains intent on improving profitability and better monetizing its real estate portfolio.
Bridget Weishaar is a senior equity analyst for Morningstar.
We continue to think that strategic store closures are necessary to align the historic store base with modern day e-commerce trends and believe that today’s announcement will go a long way to improving profitability levels and focusing investments on higher return opportunities. We also believe that this announcement is both working capital and cash flow positive as a portion of these stores are likely owned. However, we still believe that Macy’s lacks a moat and is in a sector experiencing secular decline. In our opinion, department stores will continue to be forced to compete on price with newer e-commerce entrants and an oversaturated competitive environment. As such, we continue to think that long-term top-line growth will trail that of the overall retail sector and that, after the one-time bump in profitability from store closures, further margin gains will be muted without leverage upside. We are putting our $29 fair value estimate under review to assess the impact of this announcement.
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