Macy's (M) share price tanked 7% after a yet another beat and raise quarter. The stock has dropped about 30% from its Sep highs and currently trade around $30 mark. While the fall is also inline with the decline in the broader markets, the retailer's challenge stand firm.

A closer look at Q-3 results

(M) delivered a 3.1% comp sales growth on an owned store basis in the quarter beating the street estimates also due to a lower base in the previous quarter. As per the management's commentary, the comps would have fared better had they adjusted the calendar in this quarter and would have fared slightly worse in the previous half. October comps in Q3 was strong owing to the weather, however, the comps were positive in both the previous months. The company delivered an EPS beat of 13c entirely driven by credit card income and real estate, outside of the core operations. However, the core retail operating income came at -$77m ($147m operating income + $3m in restructuring - $42m in asset sale gains - $185m in credit card revenues) which is discouraging. Even including the asset sale gains and credit card revenues, the operating margin was roughly flat 2.8% vs 2.9% YoY. Although the company improved the guidance for the year and posted a better than expected comp, the EBIT dollars remain a concern.

Holiday Cheer

According to Mastercard SpendingPulse, Retail had the best shopping season during the holiday season gone by in 6 years. Sales from Nov. 1 through Christmas Eve were up 5.1 percent to more than $850 billion with online sales growing 19.1% in the same period. Consumer confidence remained strong with apparel and home improvement being the biggest beneficiaries (both up 8% and 9% respectively). While department sales fared poorly, (M) continued to grow, according to Steve Sadove, former CEO of SAKS and advisor of Mastercard currently. While this looks promising, it remains to be seen how the department store fares in a tougher comp period (4Q 17 was the first positive comp sales growth posted by the company through 2015).

Valuation

M EV to EBITDA (3y Median) data by YCharts

The stock has gained ~18% in the last 52 weeks driven by management's turnaround plan. 2019 is expected to be another year of investment which will put pressure on the margins and an improvement in the EBIT dollars remain a concern. Also, given the higher base, it remains to be seen if the management can sustain the positive comp sales growth through the year. M currently trades at about 4.9x Fwd EBITDA compared to its 3-year median of 5.6x. Given the structural challenges that the company faces, basing on a 5x multiple, the share price comes in around $30-32 mark. Remain Neutral.