It’s been a bumpy ride for Macy’s Inc. (NYSE:M) over the past few years. Amazon.com Inc.’s (NASDAQ:AMZN) dominance in the retail space has helped cause M stock to lose 47% over the past five years and given investors reason to question whether or not the beleaguered department store has a future.
However, M stock’s losses are nothing compared to the problems that the firm’s peers like Sears Holdings Inc. (NASDAQ:SHLD) and J C Penney Inc. (NYSE:JCP) have faced. In fact, Macy’s stock is starting to show signs of life again — and a successful holiday quarter could be enough to jump-start the firm’s comeback.
Opportunity to Grab Market Share
One of the things that Macy’s has going for itself that other retailers in the space don’t is financial strength. While Macy’s does have a relatively large debt burden of $6.30 billion, its debt to equity ratio of 148.8% is nothing next to JCP’s 394.5%.
Don’t get me wrong, it’s not all roses for Macy’s financially — the firm’s most recent earnings report showed that comps declined by 4%. However, the company is also making some very positive steps toward shoring up its balance sheet and improving cash flow. Macy’s also benefits from an impressive real estate portfolio, which the company has only just begun to monetize.
While some point to the impeding failure of SHLD and JCP as reason to abandon Macy’s as well, I’d be more inclined to agree with InvestorPlace’s Luke Lango — big box stores aren’t going away completely, but there will be fewer of them in the future.
This means the failure of SHLD and JCP could actually be to the benefit of Macy’s because the firm will have the potential to gain market share from their exit. Just look at Best Buy Inc. (NYSE:BBY), which benefited considerably from the failure of peers like Circuit City and Radio Shack.
The other reason that M stock is worth a look is that the retailer has a good reputation for being shareholder-friendly. Macy’s stock dividend pays out a 6.81% yield and the firm has a payout ratio of 65.9%. While that payout ratio is definitely getting up there, management has always been committed to maintaining its dividend and continuing to reward shareholders.
Plus, Macy’s massive retail portfolio is estimated to be worth some $20 billion — that’s almost twice the firm’s enterprise value. That means investors have some cushion around their dividend payments if Macy’s isn’t able to execute its turnaround as quickly as it was hoping.
A Bright Future
Not only have we seen Macy’s improve its online presence in order to compete with Amazon, but the firm has also improved its in-store offerings in ways that are likely to draw in more customers. Its loyalty program is designed to encourage customers to spend more, and the firm is working on an off-price concept that could prove popular among more conservative spenders.
Backstage, Macy’s off-price concept, has a lot of potential to aid the company’s turnaround efforts. Retailers like TJX Companies Inc. (NYSE:TJX) have been able to continue driving foot traffic because they offer a “treasure hunt” experience in which shoppers can find bargains on name-brand goods. That kind of experience being added to Macy’s stores could help reignite store traffic and get the company back on track.
The Bottom Line on M Stock
M stock is far from being a safe bet. Macy’s is certainly up against some difficult headwinds and will likely experience a reasonable amount of turbulence in the coming year. However, investors that are willing to wait out the ups and downs will be rewarded with impressive dividend payments that are unlikely to go away any time soon.
The retail space is a risky place to put your money right now, but that means the returns could also be larger. With consumers looking like they’re ready to loosen their pursestrings, it might be worth adding some retailers to your portfolio.
Macy’s looks like it will be able to outlast its weaker competitors and that, in itself, will be a boost for M stock. The firm’s turnaround plans coupled with its massive retail portfolio make it one of the better turnaround bets in the industry right now.
As of this writing, Laura Hoy was long AMZN.