Is Macy’s Stock A Sell?

Macy’s Inc (NYSE:M) is an age-old chain of American retail stores headquartered in New York City. As the host of the annual Macy’s Thanksgiving Day Parade, its brand name is attached the largest parade in the world. But is that enough to march investors into owning shares, or is Macy’s stock a sell?

Despite growing by more than 200 percent over the past year, the company’s still trading at a relatively low 12.44 times earnings. Compare that multiple to Target Corporation (NYSE:TGT) trading at 18x earnings or Walmart Inc (NYSE:WMT) trading at 50x earnings, and you’ll see there’s room for Macy’s to expand its earnings multiple.

On the flipside, the fashion retailer is operating in a declining business. Brick-and-mortar retail was in trouble long before the pandemic accelerated the trend away from mall shopping towards online ecommerce. American malls are among the most distressed in the retail sector.

As Warren Buffett has famously commented, even a good leader cannot turnaround a bad business. He spoke in the context of leading Berkshire Hathaway when it was a textile mill company fighting cheaper overseas competitors. The same might be true today of Macy’s when competing against more agile online direct-to-consumer companies from Warby Parker (WRBY) to Allbirds (BIRD), let alone the big gorilla, Amazon (AMZN).

Death of the American Mall?

America is filled with empty retail stores that used to be major retailers like Kmart and Toys R Us. This is in spite of the number of physical locations growing by 70 percent plus over the past three years, according to the National Retail Federation.

Malls have increasing vacancy rates, according to the Federal Reserve Bank of Atlanta. And the last few years has only served to accelerate the rate climb from five to seven percent over the past decade.

That’s much higher than subgroups like general retail, strip malls, and neighborhood centers. In markets like Texas and Arkansas, mall stores have high delinquency rates. Mall foot traffic did show some growth as lockdown restrictions ended, but e-commerce continues to take its toll on the industry.

A large portion of the over 1500 Macy’s and Bloomingdale stores are mall anchor stores. When they run into choppy waters, the viability of the malls as going concerns is in doubt.

Will Macy’s Polaris Strategy Save It?

To address the systemic challenges, Macy’s announced a three-year “Polaris Strategy” meant to stabilize and grow the company. This included strengthening its Star Rewards loyalty program, optimizing stores and merchandising, and focusing on ecommerce.

By Q3 2021, the retailer credits this strategy with helping the brand add 4.4 million new customers for the quarter. 

In fact, these numbers crush year over year comparisons. The company’s diluted earnings per share came in at $0.76, compared to a $0.29 loss per share in the prior year’s quarter. They represent a strong improvement from the prior year too, with comparable sales up 37.2 percent from the prior quarter and 8.7 percent from the same quarter in 2019.

Margins improved from 35.6 percent in 2020 to 41 percent, and net credit card revenue of $213 million was up $30 million from the same period in 2019.

A further tailwind for M share price was the decision by management to repurchase $300 million of shares and pay $46 million in dividends to investors.

But can the stock price keep going up?

Macy’s Digital Marketplace: A Growth Vector

Macy’s expects net sales over $24 billion for the fiscal year, which will give it up to $4.76 EPS for the year. That puts its adjusted EBITDA at 12.5 percent of net sales, an increase of about one percent from the prior year.

The clothing seller is making some interesting moves, including launching a curated digital marketplace, which it expects to generate $10 billion in sales by 2023.

In a sign of the times, the company launched a collection of 9,510 limited-edition NFTs to celebrate its iconic Thanksgiving Day parade balloons.

The short-term buzz generated from NFTs is in contrast to concerns over the firm’s business model viability over the long term. Macy’s longevity through the next year is in question. Although the firm paid down $1.6 billion in long-term debt, it still holds a big load of nearly $3.3 billion in debt. This will take money away from investors, and that has some bearish analysts wondering if now’s the time to sell.

Is Macy’s Stock a Sell?

Despite operating in a tough retail sector, Macy’s continues to grow both its top and bottom line. CEO Jeff Gennette explains that the company is a special place for the holidays and well positioned to meet consumer demand.

The US Department of Commerce reports consistent growth in the retail sector. October’s tally of $638.2 billion is a 1.7 percent increase from the prior month. Monthly sales continue to grow, despite growing concerns of inflation and economic stagnation looming.

If you choose to hold the stock through the holiday season, it’s likely for the dividend. Macy’s suspended its dividend briefly but reinstated a drastically reduced dividend of just $0.15 in 2021. Even before economic conditions worsened, M dividend was stagnant for four straight years, pegged at $0.377.

Inflation Looms Large For Macy’s

Inflation is a big problem in the retail sector as supply chains have been crippled. Prices continue to creep higher as the global economy struggles to recover. If history is any indicator, higher costs should domino into reduced consumer spending, which would affect retailers across the board.

Also consider that 25 percent of American malls are expected to shut down through 2025, according to a study published by Coresight Research. Many are considering converting to Amazon.com (NASDAQ:AMZN) fulfillment centers. This could negatively impact Macy’s, which operates largely as a mall anchor store.  

Is Macy’s Stock A Sell: The Bottom Line

Macy’s is a long-standing traditional clothing retailer with a strong brick-and-mortar presence and a brand that remains a staple of American holiday shopping. However, the death of the American mall is like a slow motion train wreck. 

To combat the systemic risks facing the firm, management has launched a three-pronged Polaris strategy and a digital marketplace that it expects will generate billions in sales. Will be enough though?

M share price has been on a tear since its March 2020 lows and that’s a big return for anybody who bought in at the right time. Now may be a volatile time to jump in though, unless you’re really in need of a dividend payment. The headwinds facing this business could be sufficiently strong to limit progress going forward.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.