Macy’s Q4 Explains Why Its Options Are Unusually Active Today 

It’s midday in Thursday trading, but Macy’s (M) share volume is already more than double its 30-day average on immensely encouraging Q4 2022 earnings results. 

Options investors probably already had an inkling the news would be good after Wednesday’s unusual options activity was very healthy. Macy’s options volume yesterday was 74,466, more than double its 30-day average, with a put/call volume ratio of 0.86. 

As I write this, Macy’s options volume is 25,698 with a put/call ratio even lower at 0.59. The calls are clearly in command today. While that might be, I’ve got a put option in mind that income investors ought to like.

Here’s why.

The Numbers Weren’t Too Bad

Between higher interest rates and persistent inflation,  investors knew that the department store chain wouldn't report higher sales for the critical holiday quarter. As a result, consumers pulled back their spending at Christmas this year.

However, they weren't too bad.

On the top line, it had revenue of $8.26 billion, identical to analyst expectations, but down 4.6% from Q4 2021. Its same-store sales on an owned-plus-licensed basis were down 2.7% over last year but up 3.3% versus Q4 2019. 

On the bottom line, it earned $524 million ($1.88 a share) on an adjusted basis, 29.7% lower than a year earlier. However, that was 31 cents higher than the Refinitiv estimate of $1.57.

For all of 2022, its sales were $24.4 billion, with adjusted earnings of $1.26 billion. So while both were down year-over-year, its sales missed being flat over last year by just $16 million. If you’re Macy’s management, that’s a big win. 

And it did so while limiting promotional sales and bloated inventories. 

“We were competitive but measured in our promotions, took strategic markdowns and intentionally did not chase unprofitable sales," CEO Jeff Gennette, Macy’s CEO. 

“As we look to 2023 and beyond, we believe our five growth vectors which include our private brands reimagination, off-mall expansion, online marketplace, luxury brands acceleration and personalized offers and communication will further solidify our modern department store positioning.”  

One of the five mentioned above is the company’s online marketplace. In 2022, its sales were down 6% versus 2021. However, they were up 31% compared to 2019. So, the balance between brick-and-mortar and digital is improving as we move further from the pandemic. 

The other big highlight in 2022 was the performance of both its Bloomingdales and Bluemercury brands. The number of active customers that shopped the two brands in 2022 was 4.1 million (up 5% YOY) and 662,000 (+12%), respectively. 

The entire company is remarkably healthy. 

The Elephant in the Room

Everyone and their dog are predicting some recession in 2023. Macy's is no different. It warned that it expects to face macroeconomic headwinds in 2023. But, unfortunately, the company doesn’t know how long the pain will last. As a result, it was very conservative in its guidance for 2023.   

It forecasts revenue between $23.7 billion and $24.2 billion, down 3% on the low end to down 1% versus 2022 on the high end. On an adjusted earnings per share basis, it expects to earn $3.89 at the midpoint of its guidance, down from $4.48 in 2022. 

It currently trades at just 5.7x its 2023 EPS estimate. That’s significantly lower than its five-year average of 8.5x. Equally important, Macy’s generated $457 million in free cash flow in 2022. That’s a free cash flow yield of 7.6%. I consider anything above 8% to be value territory. At the very least, investors who buy at current prices are paying fair value for their shares.  

If investors didn’t know about the recession concerns and were presented with this multiple for an iconic U.S. fashion business, they'd trample each other to buy some shares. 

Alas, we do know about these concerns. 

However, the aggressive investor should look past these concerns. The company continues to focus on and invest in its five growth vectors. As a result, the death of Macy’s is greatly exaggerated. 

The Put Option I’m Looking At

There was 12 call or put options with unusual options activity on Wednesday. A majority of the options were short-duration expirations. Despite this, the Jan. 17/2025 $15 put caught my attention for several reasons.

While the 2025 put didn’t have the highest volume-to-open-interest ratio on Wednesday -- that honor belonged to the March 10 $21 call contract with volume of 6,496, 22.63x the open interest -- it was unusually active with a Vol/OI ratio of 2.43. Today, just one contract changed hands at $1.97, down 43 cents from yesterday’s last trade.  

Now, you’re looking at $197 in premium income over 687 days if you sell the put, translating into an annual return of approximately 7%. 

You’re probably wondering why the prolonged duration. 

I’m assuming you’re interested in owning Macy’s stock at a bargain price for the long haul. It last traded at $15 in September 2022. That’s where it bottomed after losing more than 50% of its value in a year. The time before that was February 2021. 

So, the chance of it returning to $15 is real but won't necessarily come to pass over the next 22 months. If you were to put the $1,500 into a two-year Treasury, you’re currently looking at 4.9%, 210 basis points less. 

And remember, you want to own the stock at a bargain price. So this gives you the best of both worlds.

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