It’s been a tough go for Macy’s (NYSE:M) over the past several years, as the traditional mall retail giant has struggled to keep up with the rapid changes percolating through the entire retail landscape. This has led to steady and persistent declines in sales, margins, profits and the M stock price.
Once upon a time, M stock was trading hands above $70; That was back in 2015. Today, Macy’s stock hovers below $20.
The simple truth about M stock is as follows: so long as concerns related to the staying power of Macy’s in today’s retail environment hang around, the company’s stock won’t stage a meaningful and sustainable rebound rally. And those concerns will stick around so long as revenues, margins and profits remain in a downtrend.
I don’t know when Macy’s revenue and profit trends will reverse course. No one really does. And anyone who has tried to guess and buy the dip in M stock over the past five years, has been burned.
But, I do think that it will happen at some point — and when it does, Macy’s stock will turn into a compelling buy.
As such, the game plan with M stock is simple. Wait on the sidelines for more clarity to emerge. Let the company report quarterly numbers, and see if those numbers imply that revenue and profit trends could improve.
When they do, buy the dip. But until then, avoid catching this falling knife.
Macy’s Is Caught on the Losing Side
The big problem with Macy’s is that it’s caught on the losing side of widening gap in the retail world, and it’s really hard to tell if/when the company will get itself on the winning side.
In the retail world, there has emerged a clear and widening separation between winners and losers over the past few years. With the likes of Walmart (NYSE:WMT), Target (NYSE:TGT), Lululemon (NASDAQ:LULU) and Costco (NASDAQ:COST) sitting in the “winners” category, and the likes of Macy’s, Nordstrom (NYSE:JWN), Kohl’s (NYSE:KSS), J.C. Penney (NYSE:JCP) and L Brands (NYSE:LB) sitting in the “losers” category.
The difference between the two groups? The former represents a collection of off-mall, omnichannel, often all-in-one retailers with differentiated value props. The latter, meanwhile, represents a collection of on-mall, physical-heavy, niche retailers with undifferentiated value props.
Macy’s is trying to break through into the first group. They are trying to build out omnichannel capabilities, develop a robust e-commerce business with good logistics, reduce its physical real estate footprint, and refresh its in-store presentation through special “growth” stores. Those are the right moves to be making. But, change requires time, and so far, these changes have yet to produce positive results. Comparable sales are still falling, margins are still compressing and profits are still being wiped out.
So long as those three things remain true, it will be tough for M stock to stage a comeback.
M Stock Will Bounce Back… Once Clarity Emerges
In the big picture, it’s fairly likely that Macy’s stabilizes its sales and profit trends in the long run, and that this stabilization sparks a big rebound in M stock. However, it’s a wild card as to when that will actually happen — and until it does happen, M stock will remain too risky to touch.
Macy’s is a very important part of the retail world today. Sure, the company is losing relevance because management has taken some missteps. But, management is now taking the right steps, and the Macy’s of tomorrow will have a more appropriately sized real estate footprint, more tech-forward stores, a bigger e-commerce platform, better logistics and more omnichannel capability.
That Macy’s — the Macy’s of tomorrow — will sustain steady revenue and profit trends. M stock, at around 7-times forward earnings and with an 8% dividend yield, isn’t priced for this. Thus, when Macy’s revenue and profit trends do stabilize, M stock will soar.
Unfortunately, Macy’s today isn’t there yet, and it is very difficult to tell when they will get there. So, as opposed to playing the guessing game here, the best thing to do is let the numbers guide you. Wait for comparable sales trends to start improving, and for comparables to creep into positive territory. Wait for margins and profits to bottom.
Then, and only then, buy the dip in M stock.
Bottom Line on M Stock
When it comes to Macy’s stock, there’s nothing wrong with playing the waiting game. Wait for the numbers turnaround, and for sales and profit trends to improve. After that happens, buy the dip, and ride the uptrend to big gains.
Until then, stay on the sidelines.
As of this writing, Luke Lango was long WMT and LULU.