The performance of Macy's, Inc. M has been a roller coaster ride for the past month, with periods of increase followed by declines. On Jul 5, 2024, the stock jumped 9.5% amid reports that activist investor Arkhouse Management and partner Brigade Capital Management had sweetened their acquisition offer for the largest U.S. department store chain.
However, this positive momentum was short-lived. On Jul 15, 2024, Macy's shares sharply declined 11.7% after the company announced the termination of discussions regarding the potential acquisition. The seven-month engagement and thorough due diligence process revealed that the proposal lacked financing certainty and did not offer sufficient value, leading to the cessation of the talks.
In the said period, shares of the company have declined 13.7%. During this period, the Zacks Retail – Regional Department Stores industry has lost 9.7%. Meanwhile, the Zacks Retail-Wholesale sector and the S&P 500 Index have risen 0.4% and 1.5%, respectively. Closing at $16.81 as of Jul 23, the Macy’s stock is currently trading 23.9% below its 52-week high of $22.10 attained on Mar 19, 2024.
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Now, the question remains whether Macy's has promising upside potential. It is undeniable that the department store operator has faced significant retail challenges. The company contends with evolving consumer behavior and economic headwinds, compounded by operational complexities. Inflationary pressures have shifted consumer spending toward essential items, impacting discretionary purchases like those offered by Macy's.
Decoding the Potential
Macy's aims to strengthen its position in the competitive retail market through its comprehensive revitalization strategy called "A Bold New Chapter." This strategy focuses on operational modernization, technological integration and enhanced customer engagement. A significant aspect of the strategy is the closure of 150 underperforming stores and the enhancement of 350 others, aiming to optimize the company's real estate portfolio for increased profitability.
Early signs of success are evident through the "First 50 Pilot" initiative, wherein Macy's carefully selected 50 store locations to test retail strategies such as product introductions and visual merchandising improvements. This initiative has shown promising results, including a 3.4% increase in comparable sales and higher customer satisfaction in the first quarter of fiscal 2024, highlighting its potential for broader implementation.
Simultaneously, Macy's is bolstering its omnichannel presence by revamping its digital platforms and marketing strategies. By integrating online and in-store experiences, and enhancing digital marketing efforts, the company aims to improve the overall customer experience, increase customer loyalty and boost conversion rates. Technological advancements, particularly the integration of artificial intelligence, are expected to streamline Macy's supply chain and enhance inventory management, thereby increasing operational efficiency and responsiveness to market demands.
Strategically, Macy's is pursuing asset monetization by closing stores and distribution centers to generate significant capital between fiscal 2024 and 2026. This move underscores the company's commitment to enhancing shareholder value. Having already raised more than $2.4 billion from real estate monetization between fiscal 2015 and 2023, Macy's is confident in its ability to secure financial stability. Since August 2021, the company has undertaken a series of aggressive measures to pay down over $1.8 billion of its long-term debt.
Growth Prospects
Macy's ambitious targets for 2025 and beyond include annual low-single-digit growth in comparable sales and a mid-single-digit improvement in adjusted EBITDA. The company also aims to return to the pre-pandemic levels of annual free cash flow. By streamlining operations, optimizing its real estate portfolio and leveraging AI for efficiency, M is well-positioned to thrive in an evolving market environment.
Estimate Trend
Analysts have responded positively to Macy's prospects, reflected in upward revisions to the Zacks Consensus Estimate for earnings per share. In the past 60 days, analysts have increased their estimates for the current fiscal year by 4 cents. The consensus estimate is pegged at $2.79 per share. The estimate for the next fiscal year has also been raised by 5 cents to $2.80 per share.
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Has Macy's Become a Value Play Post Decline?
From a valuation perspective, Macy’s shares present an attractive opportunity, trading at a discount relative to historical and industry benchmarks. With a forward 12-month price-to-sales ratio of 0.20, below the five-year median of 0.22 and the industry’s average of 0.36, the stock offers compelling value for investors seeking exposure to the sector. Additionally, Macy's current Value Score of B reinforces its attractiveness, suggesting a potentially advantageous entry point for investors.
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You Can Still Get Your Feet Wet
While Macy's recent stock performance has been turbulent, its strategic endeavors, encompassing modernizing end-to-end operations, accelerating luxury growth and enhancing customer engagement, bode well. Initiatives such as the "First 50 Pilot" have yielded early sales growth.
These efforts are designed to drive growth amid a competitive landscape that features rivals like Dillard's Inc. DDS, Walmart Inc. WMT, and Nordstrom Inc. JWN. Macy’s stock remains appealing, offering attractive valuation metrics and promising growth prospects. For investors looking for a resilient, growth-oriented opportunity, Macy’s, carrying a Zacks Rank #2 (Buy) at present, stands out as a compelling choice. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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