It has been a rough few years for mall retail stalwart Macy’s (NYSE:M) and M stock. Once the center of the American retail landscape by virtue of being at the center of every mall in America, Macy’s has since become increasingly less relevant in the American retail landscape it used to dominate.
You can thank e-commerce for that. Long story short, e-commerce disrupted the traditional retail world, Macy’s failed to adapt quickly enough, and is now left with a bunch of stores that aren’t as busy as they used to be, and an e-commerce business that isn’t as big as it should be.
The numbers speak for themselves. Over the past five years, Macy’s revenues have dropped 10%, Macy’s operating profits have dropped 50%, and Macy’s stock has dropped 70%.
Will the slide ever end? Maybe. There is a potential path forward here wherein Macy’s sales and margin stabilize, leading to a breakout rally in M stock. But, this path lacks visibility at the current moment. Instead, the most likely path forward here is continued weakness in the numbers and in shares.
The implication? Don’t count out Macy’s stock yet, but don’t count it in, either. Instead, monitor the stock from the sidelines, and see how things progress over the next few quarters.
Macy’s Stock Could Breakout Higher
There is a potential pathway wherein Macy’s stock soars from current levels, and that pathway was outlined in an investor presentation management gave at the Goldman Sachs Annual Global Retail Conference in early September.
The strategy is simple. Use technology to optimize the supply chain, and lower logistics expenses. Leverage data to reduce promotional activity, and grow gross margins. Refresh stores to be more tech-savvy and less labor-dependent, thereby reducing labor expenses and stabilizing sales. Increase usage of private label brands, so as to create a differentiated product value prop which also helps stabilize sales trends.
To be sure, doing all of that is a tall order. But it’s doable. And, if management does manage to do all of that, Macy’s stock could explode higher from here.
Here are the numbers: Net revenues are around $25 billion and dropping. Best case scenario, better product SKUs, a more attractive store presentation, and heavier usage of private label brands drives sales stabilization over the next several years. At the same time, gross margins — which are at 39% and dropping — improve as promotional activity becomes smarter and less prevalent, and the supply chain becomes more efficient. Labor expense reduction pulls out unnecessary SG&A dollars, and the opex rate somewhat stabilizes around 36%.
Fast forward to 2025. Macy’s could be looking at $25 billion in revenues, with 39% gross margins and a 36% opex rate. Ultimately, that makes right around $3 in EPS seem doable by then. Even if you throw just a conservative 10-times forward multiple on that $3 EPS estimate, that implies a 2024 price target for M stock of $30 — almost double today’s price tag.
Secular Challenges Remain for M Stock
The problem with the bull thesis on Macy’s stock today is that secular challenges cloud visibility towards a $30 price tag for M stock.
What are those secular challenges? First and foremost, it appears the retail world has moved on from Macy’s. Right now, the consumer environment is as healthy as possible — low unemployment, big wage gains, low rates, good credit, etc. Yet, Macy’s reported comparable sales growth of just 0.3% last quarter. That’s awful considering the backdrop, and it is broadly indicative of the fact that while consumers are spending money, they aren’t spending money at Macy’s.
Second, Macy’s is in a tough position where it may be tough to become relevant again. Other retailers have clear and differentiated value props. Nordstrom (NYSE:JWN), for example, is the premium fashion mall retailer. Kohl’s (NYSE:KSS), meanwhile, has off-price, off-mall appeal. Best Buy (NYSE:BBY) gives customers quasi-necessary, in-store advice on the latest tech gadgets.
What is Macy’s differentiated value prop? Tough to say. They are somewhat stuck in the middle ground between premium fashion and off price, and don’t really offer customers all that much that is unique to Macy’s. Until they do, it could be tough for Macy’s to improve traffic trends.
Third, management is all about reducing promotional activity. That’s a smart move. But, right now, it looks like promotions are the only thing driving traffic into Macy’s stores. Thus, reduced promotional activity could have a materially negative impact on sales, which could result in continued profit erosion despite margin improvement.
Big picture: there are still big secular challenges here, none of which have been have been fixed, yet. Until they do get fixed, it is probably best to avoid M stock.
Bottom Line on M Stock
The retail environment has changed dramatically over the past several years, as customers and sales have migrated in bulk into the digital channel. Some traditional retailers will survive this migration. Some traditional retailers will not.
Right now, Macy’s is having a tough time convincing investors that it will wind up in the first group. Until they do, it’s probably best to avoid M stock despite its home run potential in the long run.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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