Macy’s Stock: Why Goldman Sachs Sees More Downside

On Monday, Goldman Sachs downgraded Macy’s (M) rating to “sell” from “neutral.” Goldman Sachs analyst Alexandra Walvis also lowered the target price for the stock to $12 from $17.

Macy’s performance has been impacted by persistent weakness in the top line amid intense competition from Amazon and off-price retailers. According to The Fly, Goldman Sachs thinks that more downside in Macy’s retail business could offset its strategic initiatives and cost-saving efforts. The company has been investing significantly in its omnichannel capabilities and expanding off-price retail through Backstage stores. However, Macy’s is losing its relevance in the changing retail landscape.

Moody’s lower forecast for Macy’s and peers

Macy’s faced another unfavorable development on Monday. Moody’s cut department stores’ operating income forecast. According to Bloomberg, Moody’s expects a 20% decline in department stores’ operating income compared to the earlier projection of a 15% decline. Bloomberg also mentioned that Moody’s lowered its outlook for department stores’ profits for the third time this year.

Department stores’ performances, like Macy’s, Kohl’s, and Nordstrom, haven’t improved considerably in the second half of fiscal 2019 after a dismal first half. Meanwhile, off-price retailers TJX Companies and Ross Stores have higher store traffic. Customers continue to look for value deals.

Weak YTD performance

Macy’s sales fell 1.8% YoY (year-over-year) to $16.2 billion in the first nine months of fiscal 2019. The company’s same-store sales fell 1.0% on an owned basis. Meanwhile, the sales fell 0.8% on an owned plus licensed basis. The adjusted EPS fell 45.5% YoY in the first nine months to $0.79. Macy’s earnings fell due to higher markdowns amid weak sales and an intense promotional environment. Investments in growth initiatives also put pressure on the company’s earnings.

In comparison, Kohl’s (KSS) sales fell 2.2% YoY to $12.3 billion in the first nine months of fiscal 2019. Nordstrom’s (JWN) net sales fell 3.6% to $10.7 billion, while its overall revenues fell 3.4% YoY to about $11.0 billion.

Macy’s stock fell 2.3% on November 21. The company’s third-quarter sales lagged analysts’ forecast. However, the company’s break-even earnings were in line with the expectations. The third-quarter sales fell 4.3% YoY to $5.17 billion. The company’s sales fell due to unfavorable weather, weak international tourist spending, and softness in sales in lower-tier mails. Macy’s also lowered its fiscal 2019 sales and earnings forecast.

Where’s Macy’s stock heading? 

Among the 17 analysts tracking Macy’s stock, one recommends a “buy,” nine recommend a “hold,” and seven recommend a “sell.” Macy’s is one of the worst-performing stocks this year. As of Monday, the stock has fallen 48% YTD (year-to-date). Nordstrom and Kohl’s stocks have fallen 16.5% and 26.6%, respectively. Department store stocks have underperformed the broader market. The S&P 500 has risen 25.1% YTD. The average target price of $15.07 for Macy’s stock indicates that analysts see more downside of about 3%.

There are poor expectations for the holiday sales quarter. The expectations impact analysts’ sentiment for the stock. Read Will Macy’s Holiday Season Renew Investor Optimism? to learn more.