Over the past six months, Macy’s shares (currently trading at $13.75) have posted a disappointing 10.7% loss, well below the S&P 500’s 5.8% gain. This might have investors contemplating their next move.
Is there a buying opportunity in Macy's, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Macy's Will Underperform?
Even with the cheaper entry price, we're cautious about Macy's. Here are three reasons why you should be careful with M and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Macy’s demand has been shrinking over the last two years as its same-store sales have averaged 3.9% annual declines.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Macy’s revenue to drop by 4.3%, a decrease from This projection is underwhelming and indicates its products will see some demand headwinds.
3. Weak Operating Margin Could Cause Trouble
Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.
Macy's was profitable over the last two years but held back by its large cost base. Its average operating margin of 2.3% was weak for a consumer retail business. This result is surprising given its high gross margin as a starting point.
Final Judgment
Macy's falls short of our quality standards. Following the recent decline, the stock trades at 7.1× forward P/E (or $13.75 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.
Stocks We Would Buy Instead of Macy's
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