Retail stocks bottomed last November and have rallied since. Macy’s (NYSE:M) has been one of the bigger beneficiaries. M stock has risen 59% so far this year, and gained over 120% from November lows.

The obvious question is how much is left in that rally. And there very well could be more room to run. M stock has performed exceedingly well over the past nine months — but it still trades over 40% below 2015 highs. And with the stock trading at 10.3x the midpoint of FY18 earnings guidance, M stock still looks reasonably cheap.

Of course, Macy’s is only cheap if it can get back to stable profits, if not outright growth. And that’s why the Q2 report on Wednesday looks key. M stock has faced resistance around $40 since the beginning of June. Technically, post-earnings gains could lead to a breakout.

Fundamentally, Macy’s has reasonably soft expectations from a headline standpoint in the quarter. And it’s coming off a big Q1 beat that showed multiple catalysts going forward, as Larry Ramer detailed at the time.

So there is a path for M stock to continue its rally — if Q2 results are strong. If not, Macy’s stock could struggle — and bring down peers like JC Penney (NYSE:JCP) and Kohl’s (NYSE:KSS) with it.

Macy’s Earnings Expectations

Expectations don’t look that high for Macy’s Q2. Consensus estimates project 50 cents in EPS, just 2 cents better than the year-prior quarter despite help from tax reform. Revenue is expected to come in pretty much flat year-over-year.

But there is a one-time impact on Q2 numbers. As the company wrote in its Q1 release, the shift of its “Friends & Family” sale into the first quarter boosted same-store sales about 250 bps. That shift is coming out of Q2 numbers, providing a reasonably significant headwind to both sales and profits.

Considering that shift, then, expectations are somewhat high — with comps in the 2%-3% range, excluding the effect and for margins to stay relatively intact. But the comparison is pretty easy: same-store sales were down 2.8% in last year’s second quarter. A simple reversion to the mean should be enough to satisfy Wall Street — at least as far as the numbers go.

Looking Forward

With M stock up over 120%, Q2 earnings need to at least meet those expectations. Comparisons get harder in the second half, as CFO Karen Hoguet herself pointed out on the Q1 call. A weak quarter suggests that Macy’s could struggle once Q3 and the key Q4 roll around.

And beyond the Q2 numbers, there will be news as well. Macy’s real estate has underpinned the bull case for M stock of late, and investors will be looking for more data there. Recent sales in San Francisco are filling Macy’s coffers – and could lead the company to restart share repurchases. Full-year guidance already was raised out of Q1; another hike likely would send Macy’s stock soaring.

All told, I’d expect what at least seems like a good quarter from Macy’s on Wednesday. That’s not necessarily the same as expecting M stock to go up, however.

Is M Stock a Buy?

I’d still be rather worried about holding Macy’s stock into this report. Clearly expectations from the market, if not the Street, are rather high. As Ramer pointed out, the bull case here is that Macy’s is something close to Best Buy (NYSE:BBY) — a left-for-dead retailer who adapts to the omnichannel world, and benefits from competitors falling by the wayside. (In this scenario, Sears Holdings (NASDAQ:SHLD) plays the role of Circuit City.)

But there’s a bear case here, too. That case is relatively simple: Macy’s is benefiting from a strong economy, but not benefiting enough. Same-store sales guidance of 1%-2% really isn’t that impressive; in fact, on a normalized basis, it’s not enough to leverage annual increases in rent and labor. Add to that the easy comparison — two-year same-store sales growth still is guided negative given the nearly 3% decline a year ago — and this looks like a declining business.

That near-term argument will start to be resolved in Q2. Is Macy’s starting a turnaround? Or have easy comparisons, competitor bankruptcies, and a strong economy created a short-term spike in the numbers? Forced to choose, I’d still bet the latter. But Macy’s can dispel the skeptics — myself included — on Wednesday.

As of this writing, Vince Martin has no positions in any securities mentioned.