Macy’s (M) has done a respectable job of stabilising its situation by generating positive comparable store sales and significantly reducing its debt (with $1.1 billion in debt repurchases in 2018). Its outlook for 2019 isn’t that exciting, with expectations for modest comps gains along with higher SG&A and lower gross margins. However, this will still allow Macy’s to maintain its dividend and perhaps pay its debt down by another $500 million.
Macy’s does have a huge amount of real estate value, but also indicated that it expects asset sales to slow down in 2019. Thus it should probably be primarily valued on its operational performance, with its real estate value giving it additional options if its situation becomes more challenging.
Macy’s In 2019
Macy’s expects net sales to be approximately flat for 2019 (with comparable store sales potentially up slightly). This may result in its net sales ending up at around $24.9 billion for 2019.
There is expected to be some gross margin pressure too, so I’ve modeled gross margins at 38.9%, down around 0.2% from 2018. The combination of flat sales and a slightly lower gross margin percentage reduces Macy’s projected gross margin dollars by around $85 million.
SG&A is also expected to be up slightly, which may push the gap between 2018 and 2019 results to around $145 million before items such as gains from real estate, benefit plan income, interest expense and income tax are considered.
Macy’s has been working on reducing its debt, so its interest expense may be down around $45 million compared to 2018. It also expects a smaller amount of gains from real estate sales during the year.
Net Credit Card Revenues
Cost of Sales
Gains From Real Estate
Benefit Plan Income
This results in a projection for $980 million in net income for Macy’s, which translates into an EPS of approximately $3.14 per diluted share.
This also translates into $2.44 billion EBITDA after adding back in the $975 million in estimated depreciation and amortization as well as interest expense and income tax. Excluding real estate gains and benefit plan income would reduce this to around $2.315 billion. A similar calculation for 2018 would end up with $2.447 billion, so 2019 expectations are around $132 million lower.
If we use the $2.315 billion adjusted EBITDA number and a 5.5x EV/EBITDA multiple, this results in a projected enterprise value of $12.732 billion. With $3.589 billion in net debt, this leaves close to $30 per share in value for its common stock. A 6x EV/EBITDA multiple would result in a value of around $33 per share.
This is slightly lower than my earlier estimate of Macy’s value since its growth expectations for 2019 are coming in at the lower end of my assumptions (of +0% to +2% comps).
Macy’s should still be able to maintain its $1.51 per share in annual dividend payments though, which works out to a 6.4% yield at its current share price. Macy’s should be able to generate around $2.75 per share in free cash flow based on its current projections and without any benefit from asset sales, so there is good coverage at the moment. If Macy’s comps start turning significantly negative, it may reduce its dividend so that it can reduce its debt some more though.
Macy’s has stabilised its situation, but is not in a position where it can expect consistent comps growth (at least not more than a marginal amount). It also has some gross margin pressure as online sales continue to increase and the discount format remains popular.
Those issues are largely priced into Macy’s share price though, as its estimated value of $30 (using the lower EV/EBITDA multiple) is a decent amount higher than its current share price. Macy’s does remain vulnerable to a significant economic slowdown, as it expects only modest comps growth in a fairly strong economy. However, Macy’s also has a large amount of real estate value that it can access if needed.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.