Macy’s 8.4% return over the past six months has outpaced the S&P 500 by 5.9%, and its stock price has climbed to $18.92 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Macy's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Macy's Will Underperform?
Despite the momentum, we're swiping left on Macy's for now. Here are three reasons we avoid M and a stock we'd rather own.
1. Stores Are Closing, a Headwind for Revenue
A retailer’s store count influences how much it can sell and how quickly revenue can grow.
Macy's operated 665 locations in the latest quarter. Over the last two years, the company has generally closed its stores, averaging 3% annual declines.
When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.
2. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Macy’s demand within its existing locations has barely increased over the last two years as its same-store sales were flat.
3. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Macy's, its EPS declined by 20.7% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
Final Judgment
Macy's doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 9.1× forward P/E (or $18.92 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. Let us point you toward one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Macy's
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