3 Reasons Macy's Stock Could Rise

Macy's has plenty of plans in the works that could push the stock up even further.

Aug 21, 2014 at 2:00PM

Over the last 12 months, Macy's (NYSE:M) has outpaced the S&P 500, rising 31%. The company has posted consistent sales growth, with the exception of this year's first quarter. On the other hand, margins have seen a slight dip, suggesting that the company could be doing more to keep its head up and push earnings even higher. There are no certainties in the market, but here are three things that could help lift Macy's even higher.

1. Margins could rise in the back half of 2014

Gross margin in Macy's first half was level with 2014, but the trend is heading down. Second-quarter gross margin was down to 41.4% from 41.8% in the previous year. It's part of a longer decline in gross margin that Macy's -- and the market -- has forecast into the second half of this year. Right now, management is expecting "gross margin rate to be flat to down slightly for the season, as well as for the year," according to its second-quarter earnings call.  

Macy's has been a conservative forecaster recently. After a similarly downbeat forecast last year, the company went on to have a solid end to the year, and earned a boost from the market when annual results were announced. That's not to say that the same thing is happening here, but it's important to know that Macy's has been taking a conservative line in its forecasting.

M Gross Profit Margin (TTM) Chart

M Gross Profit Margin (TTM) data by YCharts.

Looking further back, the chart above shows that Macy's gross margin has been on a decline for the last few years. Since 2011, the company has lost almost a full point. That's bad news for the past, but a growth possibility for the future. If Macy's can claw some of that back, earnings per share could see a nice boost.

2. Omnichannel investment is starting to pay off

Macy's has been putting a great deal of its eggs in the omnichannel basket. The company is trying to maintain its leadership role in omnichannel, offering customers a variety of ways to shop and ship. Management is looking at omnichannel sales as a sales opportunity, but also as a way to recoup some of that gross margin. CFO Karen Hoguet said on the earnings call that omnichannel is "a huge opportunity across the whole P&L and balance sheet, and very exciting."

Those savings are going to come from better inventory management, as Macy's allows customers to buy online and pick up in store or to buy online and then have their products shipped from a local store. That cuts down on excess inventory and reduces the need to run clearance events, pushing gross margin up.

That's all good news, as the company is sinking a decent bit of cash into its omnichannel strategy. While management isn't providing a bottom-line cost, the company has repeatedly said that cost savings have been offset by spending on omnichannel.

3. Macy's is seeking to be the go-to location for millennials

Millennials are an odd little group. The boundaries of their definition seem to be in flux, depending on who's talking. However, there's no denying that they take up a lot of society's focus. According to advertising firm Barkley, which defines millennials as those born between 1977 and 1995, they now account for a quarter of the U.S. population and over $200 billion in yearly purchasing power.

Macy's has made the group one of its target audiences, launching a series of new lines to target the young, tech-savvy, working class. One of the company's biggest store strategies is its localization plan. This is a system that tailors the layout and inventory of a store to appeal to local shoppers, allowing Macy's to focus on millennials in populations dense with the generation.

Given the buying power of the group and the fact that Macy's is focusing so tightly on it, there is huge upside for the business here. Think back to the success that Target had 10 years ago when it suddenly turned its eye toward chic and slick design. That's the kind of growth that Macy's could be looking at now.

The bottom line
There are still a lot of pieces up in the air for Macy's. Gross margin strength will depend on back-to-school and holiday success. Omnichannel sales are still gearing up and require more investment. Fashion is fickle, though, and millenial shoppers are no different -- it'll take work to keep them hooked. If these things go wrong, Macy's path to glory could be blocked. There's still a lot of work left, but the payoff for success could be huge.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Andrew Marder has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information