Morgan Stanley Turns 'Incrementally Cautious' On Macy's After 60% Gain

Shares of Macy's Inc M have gained more than 60 percent since October, but there are reasons to believe the rally has come to an end and investors should turn "incrementally cautious" on the stock, according to Morgan Stanley.

The Analyst

Morgan Stanley's Kimberly Greenberger downgraded Macy's stock rating from Equal-weight to Underweight with a price target lowered from $27 to $25.

The Thesis

A deep dive on retail store-only comps and return on invested capital showed that Macy's continues to experience declining ROIC, Greenberger said in a Thursday downgrade note.

Macy's ROIC has been declining since 2014, only to inflect positively in the fourth quarter of 2017 when the company benefited from the following, the analyst said:

• Real estate transaction gains.
• Core retail EBIT improvements.
• Tax reform.

The positive inflection seen in Q4 naturally improved investor sentiment, but Greenberger said the retailer's ROIC deteriorated in Q1. At the same time, the company's store-only comps will continue trending negative throughout 2018 and 2019 despite lowering its footprint by 14 percent since 2014, according to Morgan Stanley. 

Macy's is showing promising signs in its private label credit card business and real estate transactions, Greenberger said. These factors mask ongoing deterioration in the core retail EBIT, which has fallen 63 percent since 2014, she said. 

Macy's saw a strong performance to end 2017, but there is little reason to suggest the brief momentum can be sustained throughout 2018 and beyond, the analyst said. 

Price Action

Shares of Macy's were trading lower by 4.4 percent at the time of publication Thursday. 

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