Is Macy's Inc. A Top Stock To Buy for 2015?

Macy's (M 1.44%) stock has rallied 12% over the past 12 months, narrowly topping the S&P 500's 10% gain. The department store chain, which also owns Bloomingdale's, has gradually bounced back since 2011, when its three consecutive years of revenue declines finally bottomed out.

CEO Terry Lundgren is widely credited for getting Macy's back on track by wooing back younger shoppers with specialized brands. Macy's also consistently marketed itself to upscale shoppers, which partially shielded it from the economic downturns that derailed Sears Holdings (SHLDQ) and J.C. Penney (JCPN.Q).

Source: Wikimedia Commons, Mike Strand.

Looking ahead, can Macy's keep that positive momentum going this year? Let's take a look at three key factors -- retail spending trends, Macy's business model, and comparisons against its industry peers -- to determine whether or not Macy's stock is worth buying.

Mixed messages
The main economic barometers in the U.S., Macy's core market, tell a mixed tale. Oil prices and unemployment in the U.S. are near multi-year lows, indicating that Americans should have higher spending power. However, U.S. retail sales last December slid 0.9% from November -- suggesting that consumers weren't eager to spend that cash. On the bright side, December retail sales improved 3.2% from a year earlier.

Macy's holiday numbers also paint a mixed picture. For the November/December period, Macy's comparable sales climbed 2.7% year-over-year. But during that period, Macy's lower-end rival J.C. Penney reported comparables growth of 3.7%. Cautious U.S. shoppers notably preferred cheaper retailers like The Gap's (GPS 0.77%) Old Navy, which posted 18% comparables growth in November and 8% growth in December. By comparison, The Gap's pricier namesake stores posted comparable declines of 4% in November and 5% in December.

Source: Wikimedia Commons, Jaranda.

This disparity suggests that the retail environment could be turning against higher end retailers like Macy's. Macy's recent announcement of the closure of 14 stores and the layoffs of up to 2,500 workers seem to confirm that shift, although it's not a major retreat -- the company will still operate 830 Macy's and Bloomingdale's stores after the transition.

Digital shift
Macy's intends to reinvest the projected savings of $140 million from those closures and layoffs back into its e-commerce initiatives.

Over the past few years, Macy's has emphasized an "omnichannel" strategy -- which cohesively blends e-commerce and brick-and-mortar initiatives -- where the two businesses complement each other by synchronizing online and in-store catalogs and using stores as fulfillment centers for online orders.

Since Macy's is blurring the lines between its brick-and-mortar and e-commerce businesses, it no longer reports online sales separately. In fiscal 2013, the last year it reported e-commerce numbers, online sales rose 40% year-over-year and accounted for 11% of its top line. Therefore, decreasing its brick-and-mortar footprint to grow its e-commerce one should be considered a smart forward-thinking move for the company.

The competition
To gauge whether or not Macy's is a solid investment, we should compare its recent sales performance against three key rivals -- Nordstrom (JWN 4.95%), Dillard's (DDS 6.45%), and J.C. Penney.

In terms of year-over-year comparable sales growth, Nordstrom -- which appeals to a slightly more affluent demographic than Macy's -- has posted consistently strong numbers, while J.C. Penney looks like a possible comeback play.

YOY comparables growth. *Excluding licensed businesses. Source: Company earnings reports.

Macy's numbers last quarter also reflect that inconsistent performance -- Wall Street had expected a 1.9% gain in comparable sales (excluding licensed businesses), but Macy's posted a 1.4% decline on that basis.

Last November, Macy's cut its full-year comparables forecast from 1.5%-2% to 0.7%-1% and reduced its full-year earnings forecast from $4.40-$4.50 to $4.25-$4.35 per share. Those expectations pale in comparison to Nordstrom, which still expects 3.5% comparables growth for fiscal 2014. That stark contrast suggests that Nordstrom could be stealing affluent customers away from Macy's.

Those red flags indicate that Macy's lumpy performance could continue after it reports its fourth quarter and full year earnings on Feb. 24.

The verdict
Macy's stock appears fairly cheap at 13 times forward earnings. Nordstrom and Dillard's have forward P/Es of 19 and 14, respectively, while J.C. Penney remains unprofitable.

However, a market filled with cautious shoppers, the surprising strength of cheaper retailers, Macy's uneven comparables performance, and bleak guidance all suggest that the stock could be headed lower this year. Investors looking for a stable department store stock should consider Nordstrom instead, while those seeking a speculative turnaround stock can keep an eye on J.C. Penney.