Deutsche Bank Downgrades Macy's (M) Two Notches to Sell

Deutsche Bank downgraded Macy's (NYSE: M) from Buy to Sell with a price target of $63.00 (from $71.00). Analyst Paul Trussell thinks EPS growth will be limited by stagnant SSS, and he thinks there is low likelihood the company will following in the footsteps of other retailers by utilizing a REIT.

"We are downgrading M to Sell from Buy as we lower our estimates below the Street and guidance (DB $5.03 for FY16 EPS vs. consensus $5.17) to reflect low confidence that the company can bust out of its SSS rut, sales deleverage, and increasing pressure from shipping, healthcare, and retirement expenses," said Trussell. "Furthermore, as EBITDA should stay flattish with capex constant, we would expect pressure on FCF to translate to reduced share repurchase activity. While we acknowledge that real estate monetization is a key risk to our Sell rating, we think the probability of a significant event is low."

"A confluence of factors should cap EPS growth at MSD-HSD over the next couple of years, namely: 1) anemic comp sales growth driven by category challenges, tourism headwinds, declines at KORS, vendors as competition, and one less F&F sale (2Q15 impact); 2) flattish EBITDA with sales deleverage, no relief in the promo environment, increasing healthcare and retirement spend, and increasing shipping costs; and 3) a slower pace of share buyback as no EBITDA growth coupled with constant capex should pressure FCF while M is already approaching the high end of its target leverage ratio range," continued the analyst.

Trussell added, "We acknowledge that unlocking the real estate portfolio could drive significant value and represents a key risk to our Sell rating. Real estate optionality has attracted attention from investors in recent months with the possibility of M following in the footsteps of HBC and SHLD by utilizing a REIT. While we believe the likelihood is low, especially with respect to the flagship owned properties, in this note we run through the valuation exercise. We estimate the value of M’s real estate at ~$32/share using a cap rate of 6.5% and including a $5.9B premium for key properties. We also note that M’s stock is up 7% since reporting 1Q results, which we fully attribute to REIT speculation."

For an analyst ratings summary and ratings history on Macy's click here. For more ratings news on Macy's click here.

Shares of Macy's closed at $69.85 yesterday.

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