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Why Macy's Offers Good Value

Macy's Inc. (NYSE:M) could deliver a stock price turnaround after its 33% decline over the past year.

The retailer is improving its loyalty program, upgrading its website and is cutting costs to become more efficient.

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Loyalty program

The department store is improving its loyalty program to make it more accessible to a wider range of customers. For example, earlier this month, it announced that members can now earn rewards points on all of the products sold by the company, including third-party brands.

In addition, Macy's has improved the offers available to its loyalty program members, including free gifts on their birthdays and exclusive discounts. This initiative could increase the appeal of the loyalty program among customers and may enable it to grow its membership numbers from the current 30 million.

The retailer's loyalty program provides it with extensive data on the shopping habits of its customers, which can be used to provide them with personal recommendations and may improve Macy's sales performance in coming years.

Store investment

Macy's plans to close 125 of its least profitable stores over the next five years, which could positively impact its financial performance and enable it to focus its investments on stores where it has a higher chance of producing profit growth.

The company plans to upgrade 100 of its stores in fiscal 2020. The upgrades will include investments in new technology to improve the shopping experience and new displays that are aimed at maximizing its sales. The stores that have already been upgraded have produced stronger performances than its existing stores, according to the retailer's fiscal third-quarter results.

The company is testing a new store format called Market by Macy's. The stores are smaller and will sell popular Macy's products and host regular community events. The new store format could broaden the retailer's appeal to a wider range of consumers and help to build a stronger sense of customer loyalty that increases the size of its economic moat.

Potential difficulties

The company's financial performance in fiscal 2019 was tepid. It posted sales growth in the first half of the year, but reported a 3.5% decline in comparable sales in the third quarter. This was due to weak demand within its tourist segment, which could continue due to the ongoing challenges posed by the spread of coronavirus. In addition, its website was negatively impacted by planned upgrades that caused difficulties for some of its customers who were trying to order online.

The company has completed the improvements to its website, which is now faster and easier to use. Macy's also rolled out its same-day delivery services for online orders in the third quarter, which could strengthen sales performance.

In addition, the retailer is aiming to cut its costs by reducing the number of employees by 9%, which equates to 2,000 positions. It is also redesigning its shipping services to improve its overall efficiency. These changes are expected to contribute to annual gross savings of $1.5 billion from 2022 onwards, which may improve the retailer's margins and catalyze its bottom line.

Future prospects

Market analysts forecast the company will report a 10% decline in earnings per share in fiscal 2021. Its forward price-earnings ratio of 6.8 suggests it offers a wide margin of safety, and that investors have priced in the decline in profitability. Macy's growth strategy indicates that it offers recovery potential over the coming years.

Disclosure: The author has no positions in any stocks mentioned.

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This article first appeared on GuruFocus.