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Macy’s Stock: Beware the Value Trap

Macy’s (M) is a brick-and-mortar and online retail department store operator.

Macy’s sells everything from clothes, to home goods and furniture. The stores are generally anchor stores for local malls, which have struggled in recent years.

I am neutral on M stock. (See Analysts’ Top Stocks on TipRanks)

Secular Trends

The rise of-commerce and decline of regional malls is well documented.

Once the go-to retailers for clothing, home goods, jewelry, and other products, department stores are now on the decline. Since the year 2000, department store sales have declined over 34.5%. Further, according to CNBC, 25% of the remaining malls in the United States could close within the next five years.

This climate creates a significant challenge for Macy’s. To compete, they have expanded their online services. However, it may be too little too late.

Trends Accelerated by Pandemic

When COVID-19 hit the United States in early spring of 2020, department store sales cratered another 42%. They have since recovered and are actually a bit above February 2020 numbers. However, this may be a bounce that is unlikely to last, given the 20-year trend downward.

The pandemic accelerated bankruptcy trends among retailers. Many of these brands are located in the same malls as Macy’s.

Some of these include other legacy department stores. Lord & Taylor, Neiman Marcus, and JCPenney all were forced into reorganization.

This is an ominous sign. It is also not good for business to have empty space in malls in which Macy’s resides. As less people shop at the mall there are more empty stores. In turn, less people shop at the mall. It is a terminal spiral.

By the Numbers

Macy’s operating revenue has fallen more than 16% over the previous five years on a trailing 12-month basis. However, the company has survived what is likely the worst of the pandemic. Quarterly revenue for Q2 fiscal 2021 was actually up slightly from the same period in 2019. This is a credit to management. It may also be boosted by stimulus given to consumers.

Earnings per diluted share over the prior 12 months are also positive, coming in at $1.65 per share. This amounts to a respectable valuation of 14.7 price-to-earnings for the trailing 12 months and just 9.4 on a forward basis. However, beware of the value trap. Secular trends are unlikely to reverse in the near future, if ever.

A value trap is a stock that appears to be undervalued, convincing an investor to purchase, only to continue to wallow at these low valuations for years.

Wall Streets Take

Turning to Wall Street, analysts are mixed on Macy’s stock. Four analysts have Buy ratings, four chime in with Hold ratings, and four come in at Sell. The number of Sell ratings is telling.

The average Macy’s price target of $24.73 implies 5.4% downside from the current price.

Macy’s Website Traffic

According to TipRanks’ Website Traffic Tool, quarter-to-date visits to Macys.com are down from the same period in the previous year. This stands to reason as the pandemic and stay-at-home orders were in effect in many localities in late 2020.

Website traffic figures bear close watching, as online sales are critical to the store’s future prospects.

Summary on Macy’s

Many believed that the pandemic would finally be the catalyst to push Macy’s into bankruptcy. That did not happen. Instead, management has weathered the worst of the storm, and revenue is now growing over 2019 levels.

While that is a positive development, the company is still fighting very strong secular headwinds. The company’s valuation is low, however this may be a classic value trap moving forward, as growth is expected to stagnate.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.

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