The bears continue to have their doubts, but the fact of the matter is Macy’s Inc (NYSE:M) is turning a corner. I have maintained my belief in the resilience of the business despite naysayers calling for the death of Macy’s and retail as a whole. And, finally, this past quarter… validation.
While it’s far too early to be popping champagne bottles, the third quarter earnings beat and full-year guidance are reassuring for shareholders. Small upticks can’t reverse the 44% decline that the stock has suffered this year, but it’s a good indication for what is to come.
Now, that’s not to say that massive surges upward in share price are guaranteed over the remainder of this year — the fourth quarter being a disproportionate contributor to retailers’ earnings — but for those with some patience, there is momentum and other positive indicators on your side. For one, headline risk — overblown to begin with — is decreasing and, strategically, M is heading in a direction to rebuild shareholder wealth.
And as a quick note upfront, that 7.6% dividend yield looks extremely attractive as a sort of compensation for sticking with M. Income investors may find the underlying stock volatility to be too much for comfort, but it’s worth at least a closer and more serious look than the last go-around.
M’s New Concepts
Bluemercury continues to be rolled out with eight new freestanding beauty specialty stores added during the quarter. That brings the total to 135 stores along with 45 Macy’s Backstage off-price stores, of which seven new stores were added during the quarter.
Little color was added beyond the footprint expansion, but Macy’s is heading in the right direction by continuing to invest in new concepts that are fresher and will keep existing customers engaged and attract new ones. What we do know is that management is “encouraged by the potential of Backstage in Macy’s stores.”
M to Capitalize on Holiday Season
In addition to new store concepts, this holiday season will show just how powerful Macy’s is given its prime locations and new product mix. CEO Jeff Gennette emphasized:
“We are excited about our plans for holiday, which is when Macy’s truly shines as a gifting destination. The loyalty program, special in-store experiences and a strong mobile and online presence will help drive holiday sales.”
Management expects continued improvements into the fourth quarter with loyalty and digital doing their part to drive business. I have a feeling that the company is keeping expectations on the conservative side for a sure beat next quarter.
The Bottom Line on M
So to take stock quickly: Macy’s is in the process of optimizing its footprint and product offerings across its 700 department stores and, with Christmas season ahead, I think there is a distinct opportunity to surprise to the upside on the next earnings call.
Operating margins are improving, as is net income, on a year-over-year basis, and M is on track to meet full-year guidance, despite many pundits casting doubts. Digital is showing double-digit growth, proving that Macy’s is a true omnichannel retailer and has what it takes to compete in the current hyper competitive landscape.
Valuation is cheap, and there’s substantial yield to provide a degree of safety around an investment that already is protected by M’s real estate holdings.
I continue to maintain a positive outlook on M stock and believe there is significant amounts of unlocked value in the equity. So I’m sticking with M and awaiting further good news.
As of this writing, Luce Emerson was long Macy’s stock.
