Macy’s (M) is an omnichannel retail company operating stores, websites, and mobile applications under its three brands: Macy’s, Bloomingdale’s, and Bluemercury. It offers a broad range of merchandise through these brands, including clothing and accessories, cosmetics, home furnishings, and other consumer goods.
Macy’s has been continuously impacted by the rise in e-commerce sales for years now, which has resulted in softened retail sales, hence hurting Macy’s financials. Over the past couple of years, the company has been making strategic moves to turn around its business. However, it’s still speculative whether management’s developments will ultimately be successful.
One such strategic action is the company’s expansion of its own online business, heading towards an omnichannel approach to integrate online and brick-and-mortar sales. Another development is the closure of Macy’s least profitable locations to concentrate on the most profitable ones, which is likely to help the company’s struggling bottom line.
That said, the current consumer trends in shopping are quite clear, and they point towards further declines in retail sales. Hence, the company operates in an unfavorable environment, making its pivoting journey towards sustainable profitability going forward quite hard.
Simultaneously, I don’t find the current dividend levels appealing, while the stock’s seemingly cheap valuation does not necessarily imply that investors enjoy a wide margin of safety, in my view. For this reason, I am neutral on the stock.
Latest Results
Macy’s Q3-2021 results showed improvements from last year’s depressed performance, with revenues totaling $5.44 billion during the quarter, implying a 35.6% increase year-over-year. While this may sound like very exciting revenue growth, it is mostly attributed to the pandemic’s restrictions weakening year-over-year, allowing Macy’s to run its locations with greater flexibility.
Thankfully, the boost in revenues led to a significant margin expansion versus last year’s results, resulting in improvements in Macy’s bottom line as well. The company reported EPS of $1.23 during Q3, which compared to a loss of $0.19 per share against Q3 2020. Management expects Fiscal Year 2021 EPS to land around $4.65, suggesting a robust recovery compared to last year.
The Dividend and Valuation
Following the dividend’s suspension in the midst of the pandemic, Macy resumed its quarterly payments earlier in 2021, at an annual rate of $0.60. At the stock’s current levels, its yield stands at around 2.2%, which I do not find sufficient considering Macy’s risk profile.
While it may seem like the company has room to grow the dividend based on management’s guidance, note that Macy’s is heavily indebted with a net debt position of $6.21 billion. For this reason, management will likely focus on deleveraging before potential hiking capital returns.
As far as Macy’s valuation goes, the stock’s P/E stands at around 5.8 based on management’s midpoint guidance and its current price. Again, this may sound like an appealing multiple. However, it can also be misleading based on how burned the balance sheet is, which means that Macy’s earnings capacity does not necessarily reflect incremental gains to shareholders’ equity.
Wall Street’s Take
Turning to Wall Street, Macy’s has a Hold consensus rating, based on three Buys, three Holds, and four Sells assigned in the past three months. At $36.70, the average Macy’s stock price prediction implies 34.7% upside potential.
Conclusion
Macy’s may look like a cheap stock based on its valuation multiples and latest quarterly results. However, the company is heavily indebted, operating in an unfavorable environment, while the stock’s capital returns are not sufficient to justify the underlying risk-taking.
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