Macy's Inc (M) Stock Faces Uphill Battle
Macy's Inc. (NYSE: M) stock has taken quite a beating this week, dropping roughly 15 percent after second-quarter earnings disappointed the market. Unfortunately for Macy's investors, analysts say the second half of 2018 will be more challenging.
Bank of America analyst Lorraine Hutchinson says Macy's should be commended for its performance in the first half of the year -- shares are still up roughly 40 percent year-to-date -- but it will be much more impressive if the company can deliver the same performance over the next two quarters.
Lorraine says improvements to same-store sales in the first half of the year were driven by a stronger U.S. consumer population and a much tighter inventory that generated higher average unit retail. AUR was up 4.6 percent in the first two quarters of the year, and total transactions were up 0.5 percent. At the same time, unit sales were down 2.6 percent. Lorraine also says Macy's recent comparisons have benefited from aggressive beauty and housewares discounting in the first half of 2017.
[See: 7 of the Best Stocks to Buy for 2018.]
"We see risk to the [second half] owned comp guide for 1.9 percent to 2.4 percent as comparisons are tougher, the tourist benefit wanes, and the calendar shift flips to a headwind," Lorraine says.
She also says Macy's is facing major gross margin headwinds in the second half of the year, including a rise in shipping expenses associated with the free shipping promotion for credit card users who spend more than $500 per year. Bank of America is projecting Macy's gross margins will drop 0.25 percent in the second half of 2018.
"For 2H18, M will need to rely more on its sales initiatives to drive comp, in particular, its updated loyalty program, the Backstage roll-out and investments in its top 50 stores," Lorraine says.
CFRA analyst Efraim Levy says Macy's loyalty program will be a double-edged sword in coming quarters.
"Loyalty program growth will likely help sales and credit income but should result in higher delivery costs in the second half," Levy says.
However, the post-earnings sell-off has made Macy's dividend more appealing for investors.
"The company's 4.1 percent dividend yield adds to total return potential," Levy says.
[See: 7 Stocks That Soar in a Recession.]
Bank of America has a "neutral" rating and $39 price target for Macy's. CFRA has a "hold" rating and $42 target for Macy's stock.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.
