Macy's Analysts Remain Cautious After Q3 Earnings: 'Visibility Limited In The Near Term'

Macy’s Inc (NYSE:M) reported third-quarter financial results on Wednesday. Analysts are largely encouraged by the company’s progress, but remain cautious due to margin pressures.

What Happened: Macy’s reported strong headline results for the third quarter, beating analyst estimates for revenue and adjusted earnings. However, margin pressures pushed the company to lower its earnings guidance, which has analysts exercising caution in the wake of the report.

“M slightly raised its sales outlook for the year while reducing expectations for gross margin and leaving its SG&A outlook largely intact, reflecting continued macro challenges, including discerning consumer spending and elevated promotional activity along with incremental delivery expense following its investigation of accounting irregularities,” Telsey Advisory Group analyst Dana Telsey said in a new note to clients.

While preparing the company’s quarterly report, Macy’s identified an issue related to delivery expenses in one of its accounts and initiated an independent investigation. The company determined that a single employee intentionally made erroneous accounting entries to hide approximately $151 million of cumulative delivery expenses.

Telsey expressed optimism about Macy’s turnaround plans involving closing underperforming stores and investing in high potential locations. The analyst believes the strategy is “reasonable” and makes sense given the structural shifts at the company.

“However, with visibility limited in the near term as macro pressures weigh, Macy’s is still facing challenges while operating in a competitive promotional space against an uncertain macro-operating environment with traffic challenges to the category,” the Telsey Advisory analyst said.

Telsey lowered earnings estimates for full-year 2024 and full-year 2025, and maintained Macy’s with a Market Perform rating and price target of $17.

Check This Out: Macy’s Employee Hid $151 Million In Costs Over Several Years

Analysts at Goldman Sachs also pointed to mounting margin pressure driven by a heightened promotional environment and higher clearance rates on cold weather products.

Goldman analyst Brooke Roach applauded management’s plans to close stores and focus on test initiatives at First 50 locations. The analyst believes the strategy shift could mark an inflection point for comparable growth and EBITDA expansion in 2025.

“That said, we continue to closely watch M's inventory control and gross margin delivery, as this has underperformed our expectations this year and has resulted in several consecutive cuts to guidance as a result of a more value-focused consumer overall,” Roach said.

Goldman maintained a Buy rating on Macy’s despite margin concerns, as the firm expects quarterly results to improve sequentially moving forward, driven by the holiday season, store closures and the cycling of specific margin pressures such as the recently completed delivery expense investigation.

Guggenheim analyst Robert Drbul reiterated a Neutral rating following the print as he is encouraged by the strategic direction of the company, but the analyst lowered earnings estimates on expectations of a heightened promotional environment, paired with potential small packaged expense revisions.

The Guggenheim analyst believes Macy’s will be able to close 65 stores this year given the favorable deal-making real estate environment, up from prior estimates of 55 store closures.

“While we are encouraged by store optimization and its magnitude, as we believe it will not only be beneficial for Macy’s but for the overall industry, we await the traction of this initiative into ’25 and reiterate our Neutral rating,” Drbul said.

M Price Action: Macy’s shares were down 1.93% at $16.26 at the time of publication, according to Benzinga Pro.

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Photo: courtesy of Macy’s.