Macy’s, Inc. (M) stock tumbled Thursday in sympathy with Kohl’s Corporation (KSS) and Ralph Lauren Corp (RL) after those companies released disappointing earnings and guidance.
Meanwhile, the nation’s largest department store operator doesn’t report fourth-quarter results until Feb. 23, so buckle up for potential turbulence in Macy’s stock price.
Thankfully for anyone holding Macy’s stock, shares are off to a great start in 2016. Even after the morning selloff, Macy’s stock was up 16% year-to-date. Meanwhile, the S&P 500 was off 6% over the same span.
That’s some serious outperformance … but then, Macy’s owes at least that much to shareholders after a horrible 2015.
Up Times and Down for Macy’s Stock
Despite a last-minute rally ahead of the holiday selling season, Macy’s stock closed last year with a loss of more than 35%.
Macy’s first reported trouble last summer, when it cut its outlook. The retailer blamed the West Coast port strike and a strong dollar hurting sales to tourists.
Sure, the higher greenback has got to be part of it, but that affects only a small portion of Macy’s 850-plus stores, such as Bloomingdale’s in midtown Manhattan.
Macy’s isn’t really a multinational, so something else must be at work. After all, Kohl’s didn’t get crushed because it’s a tourist destination.
What’s more worrisome for Macy’s stock and others is the state of retail spending, which has been weak overall and slipping at department stores. Macy’s warned investors last year that consumer demand was “restrained” in many categories of merchandise.
Macy’s Macro Challenges
That macroeconomic backdrop played a big part in the sales shortfalls at Kohl’s and Ralph Lauren last quarter. Of course the companies blamed unusually warm winter weather and the dollar, but the issues are deeper than that. Don’t forget that the shift to online shopping represents a growing threat that isn’t going away.
Any way you look at it, the department store sector is in a slump, and that hurts a wide swatch of industry names. Ralph Lauren, for example, counts department stores and malls as major customers … venues where traffic has been sluggish.
That doesn’t mean M stock is doomed, but the market is right to recalibrate the Macy’s stock price. Shares currently trade at just at less than 11 times forward earnings. That’s about a 10% discount to Macy’s stock’s five-year average, but the way the market and economy are going these days, it’s probably not enough.
In the long run, Macy’s stock is probably a bargain at current levels. Of course, in the long run we are all dead, as John Maynard Keynes said.
It wouldn’t be surprising to see heightened volatility in Macy’s stock as we wait for earnings later this month. If you’re thinking of committing new funds, you might want to play it safe and wait until after the report.
Yes, you could miss some upside if Macy’s delivers a beat-and-raise quarter, but that feels unlikely in today’s retail climate.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
