Retail investors will watch with interest as Macy’s Inc (NYSE:M) reports Q1 earnings. The Cincinnati-based retailer saw strong sales during last year’s Christmas season. Macy’s stock still suffers from the competitive challenge posed by online retailing. Macy’s has shown it can survive and maintain a generous dividend.
However, investors need to see signs that the company can turn around its earnings declines before Macy’s stock will thrive.
Earnings Report and Macy’s Recovery
Macy’s reports earnings on Wednesday before the bell. Analysts expect the company to earn 36 cents per share. The company earned 24 cents per share in the same quarter last year. They also expect revenues to come in at $5.39 billion, a modest increase from the $5.34 billion the company saw last year.
Like most of its brick-and-mortar peers, Wall Street wrote off Macy’s stock on the perception that Amazon.com, Inc. (NASDAQ:AMZN) was going to “take over” retail. However, that feeling proved untrue with Walmart Inc (NYSE:WMT) 25 years ago and Sears Holdings Corp (NASDAQ:SHLD) 50 years ago.
The perception on Amazon came into question when Macy’s roared back following a robust Christmas shopping season. Macy’s stock, which briefly traded below $17.50 per share in November, now stands at just under $30 per share six months later.
Macy’s Stock Challenges
In a previous article, I argued that investors should buy M stock for the dividend alone. For the first time since 2010, Macy’s neglected to increase its dividend in 2017. However, the dividend earns a yield of just over 5.1%. Thanks to the Amazon-inspired e-commerce onslaught, Macy’s stock still trades at less than half of its 2015 high.
In my opinion, dividends remain the best reason to buy Macy’s. At first glance, the price-to-earnings (PE) ratio of seven might draw investors. However, the forward PE stands at about 8.6.
Analysts expect further declines in earnings in the two fiscal years after. If the prediction of $1.90 per share for fiscal 2021 holds, that will place the 2021 forward PE at over 15 at today’s stock price.
Macy’s Needs to Thrive, Not Just Survive
Unlike Sears or J C Penney Company Inc (NYSE:JCP), Macy’s ability to survive or even to continue its dividend is not in question. Its ability to thrive is. Wall Street needs to see signs that the company can arrest earnings declines and perhaps return to a path of earnings growth.
One thing they can do Wednesday is meet, or ideally beat, earnings expectations. Macy’s last earnings miss occurred in this same quarter last year. Reporting an earnings beat would reassure Wall Street. Seeing the company raise its outlook for 2018 would also help.
If one buys stocks for income or in hopes of a long-term comeback, I see Macy’s stock as a buy. It generates sufficient cash flow to pay the dividend.
Macy’s also owns enough real estate that its $9.1 billion market cap undervalues the company. However, when it comes to its next earnings report, the near-term performance of Macy’s stock depends on its earnings outlook.
The Bottom Line on Macy’s Stock
Although Macy’s remains a buy at these levels, the company needs to show Wall Street how it will thrive. M stock has come back as the company responded to the “Amazon is going to take over” narrative with a strong performance last Christmas. Now it faces the challenge of reviving growth so the Macy’s stock price can return to 2015 levels and beyond.
In my opinion, the answer lies in looking at the long, long term. R.H. Macy founded the company back in 1858. Since that time, the company survived a Civil War and two World Wars. It stayed in businesses through the rise and fall of several prominent retailers.
Although this history included a bankruptcy in 1992, nobody questions its financial viability today. If Macy’s survived all that, it can survive Amazon as well. And when it fully recovers from the Amazon onslaught, owners of Macy’s stock will probably be left smiling.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
