Macy's is facing an 'uphill battle'
Morgan Stanley is bearish on Macy's after research showed continued declines in same-store sales and return-on-capital investments.
Macy’s reliance on private-label credit-card income and real-estate gains has been hiding the deterioration in its core business.
Macy's proved it might survive the retail apocalypse after exceeding expectations during its last quarterly earnings report. However, the risks now outweigh the rewards as share prices have risen 61% since October and Morgan Stanley's research shows continued declines in same-store sales and return-on-capital investments.
"Post Q1, 2018 could be an uphill battle," Morgan Stanley analyst Kimberly Greenberger wrote in a note to clients. She downgraded the stock to "underweight" and lowered her 12-month price target to $25 from $27.
While Macy's is closing stores to adapt to a new retail-industry environment, Greenberger warned the negative store-only comps (comparative same-store sales) hint the company isn't moving fast enough. She predicts the trend will only continue.
Greenberger, who remains cautious on the retail sector as a whole, also points out that Macy’s reliance on private-label credit-card income and real-estate gains has been hiding the deterioration in its core business. She says the company's core-retail operating profit has declined 63% since 2014.
Macy's has been battling declining sales and competition from e-commerce for years. The overall decline in American mall traffic has hurt the retailer further, forcing it to announce the closure of up to 100 stores around the country. In recent months, the company launched efforts to better combine its online and in-store services and become more of a discount store to attract customers.
Macy's is up 11% this year.
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