The retailer's ongoing lack of pricing power is leading us to nick a few dollars off our $40 fair value estimate.
2% comparable owned and licensed sales decline in November and December was slightly ahead of our fourth-quarter expectation of a 3% dip, lowered adjusted earnings guidance (now calling for $2.95-$3.10 versus previous guidance of $3.15-$3.40 and our $3.30 estimate) suggests that traffic is worsening in January and that margins have likely taken a hit. Management also announced the closure of 68 stores but we note that these are a part of the previously announced 100 closings (discussed in August 2016) and were already reflected in our long-term outlook. Further, the combined $550 million in annual expense savings from the store closures and restructuring efforts in this announcement only slightly exceeds our $500 million estimate (which is in line with management's plans announced in fall 2015) and the time value impact due to its achievement one year early. Therefore, we saw little to be encouraged by in this release.
Bridget Weishaar is a senior equity analyst for Morningstar.
We continue to think that revenue will fall in the low-single digits on average annually over the next five years and our expectation for 2% comparable sales declines in 2017 is already in line with management comments that 2017 will be similar to November/December comparable sales performance. In our opinion, the department store space is the most exposed to the e-commerce threat as many of the same products can be found in both channels (this is reflected in our belief that Macy’s does not possess a competitive moat). However, we now think that we underestimated Macy's lack of pricing power. We previously thought that improved inventory levels would result in lower discounting. The guidance released today suggests that this is not the case. Therefore, we see our long-term operating margin estimate (averaging 8% over the next five years versus 8.6% in 2015 and 9.6% on average over the past three years) as too optimistic. Our $40 fair value estimate will likely fall $2-$3 to reflect this.
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