Macy's has had an impressive run over the past six months as its shares have beaten the S&P 500 by 9.8%. The stock now trades at $22.79, marking a 25.7% gain. This was partly thanks 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? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Macy's Will Underperform?
Despite the momentum, we’re passing on Macy's for now. Here are three reasons we avoid M, plus one stock we’d rather own.
1. Stores Are Closing, a Headwind for Revenue
A retailer’s store count often determines how much revenue it can generate.
Macy's operated 661 locations in the latest quarter. Over the last two years, the company has generally closed its stores, averaging 3.6% 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. Same-Store Sales Falling Behind Peers
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 been relatively stable over the last two years but was below most retailers. On average, the company’s same-store sales have grown by 1.3% per year.
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 10.7% 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 falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 10.6× forward P/E (or $22.79 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d suggest looking at an all-weather company that owns household favorite Taco Bell.
Stocks We Like More Than Macy's
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