Uncategorized

Macy’s beats earnings, anticipates further debt reduction

| November 16, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Benefiting from another solid quarter of earnings, Macy’s management plans to use excess cash to continue reducing debt. The lower leverage should serve as a catalyst for spreads to grind tighter, unlocking value in some short dated bonds if management uses the opportunity to extend the maturity of a existing revolver.

Earnings recap

Macy’s posted yet another solid quarter of results as same store sales (SSS) beat street estimates once again, with SSS growth on an owned and licensed basis of 3.3% in the quarter, well above the street forecast of 2.8%.  Second quarter marks M’s fourth consecutive quarter of SSS growth.  Management noted that they continue to see an improved trend in brick and mortar and witnessed good growth across Macy’s, Bloomingdale’s and Bluemercury.  In particular, the Growth 50 stores (magnet stores) are performing above peers, so management plans to roll out the initiative to 100 more stores in 2019.

Gross margin was 40.3% in the quarter which was flat to the year ago period.  While merchandise margins were better yoy due to stronger regular price selling, it was offset by increased transportation costs related to its loyalty program and growth in online sales.  M ended the quarter with inventory up 50 bp on a comparable basis which was in line with expectations due to calendar shifts.  Management is still forecasting inventory levels at year end to be down versus last year.  The adjusted EBITDA margin was down 45 bp yoy to 7.65%.  The decline primarily reflects the loss of EBITDA associated with certain asset sales.

Full year guidance raised again

With the better than expected results, M increased full year guidance once again.  SSS on an owned and licensed basis are now expected to up in the 2.3%-2.5% range for the full year.  This is up from previous guidance of 2.1%-2.5%.  Net sales will be up in the 0.3%-0.7% range, up from flat to 0.7%.  Full year EPS was raised to the $4.10-$4.30 range, up from previous guidance of $3.95-$4.15.  Full year gross margin is still expected to be up slightly for the year, reflecting better merchandise margins offset by higher transportation costs.   

Debt reduction remains a priority 

Management reiterated its lease adjusted leverage target of 2.5x-2.8x and they still anticipate debt reduction to remain a priority for excess cash for the remainder of 2018.  M noted that having a healthy balance sheet is key to maintaining both flexibility and durability.  M has reduced $351 million of total debt year to date.  Given the debt reduction and the improved EBITDA  – $1.48 billion year to date versus $1.44 billion in the year ago period – we estimate that M ended the quarter with lease adjusted leverage of roughly 2.6x, down sequentially from 2.7x.

Relative value

Further debt reduction will be a catalyst for M spreads to grind tighter, unlocking value in the M 2.875% 2/15/23 bonds which are currently trading 50 bp (g-spread) behind the M 3.45% 1/15/21.  The large trading differential is due to a technical created by the current maturity on the company’s revolving credit facility, which matures on 5/6/21.  Given the improved results and better leverage, management will look to extend the maturity of the bank line to a true 5-year.  If the line is extended, the 2.875% 2/15/23 bonds would then mature ahead of the facility and should make the differential between the 3.45% 2021 and the 2.875% 2023 bonds collapse.  Furthermore, we note that BBB discretionary 2y/4y curve is currently worth 30 bp.

admin
jkillian@apsec.com
john.killian@santander.us 1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles