Macy's 'Innovation Ideas' Are Good But Not Good Enough, Morgan Stanley Says

Macy's Inc M presented to investors new details of a turnaround plan that sounds compelling but not enough to "turn the tide," according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Kimberly Greenberger maintains an Underweight rating on Macy's with a price target lowered from $20 to $17.

The Thesis

Macy's reported second-quarter results, which expanded its total core retail operations losses to $70 million for the first half of 2019, Greenberger wrote in a note. Total operating income dollars were 37% lower year-over-year at $361 million. More concerning is the fact that core retail EBIT dollars in the fourth quarter at $645 million is now down 68% since peaking in 2014.

During Macy's conference call management detailed new initiatives, including a new ThredUp pilot (fashion resale marketplace) and a subscription service at Bloomingdale's that can eventually be expanded to the core Macy's store.

Management also detailed encouraging results from pilot projects. The company said it realized $4 of incremental margin per inventory unit for an additional $2/unit cost from its "Hold and Flow" test. All six destination businesses that focus on fine jewelry, mens' tailored, and women's shoes outperformed on market share, return on investment, and profit.

The company deserves credit for its effort to innovate and implement new and creative strategies to drive business. However, Greenberger said there is no clear sign that the declining core retail EBIT trend can reverse and the company faces new risk from deteriorating credit and new tariffs.

Price Action

Shares of Macy's were trading lower by 4.6% Thursday at $16.02.

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