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Is Macy's Stock a Buy?

By Lawrence Rothman, CFA – Jun 5, 2020 at 9:15AM

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With Macy's stock trading more than 50% below late February's level, is now a good time to jump in?

In mid-March, Macy's (M -0.44%) closed all of its approximately 775 stores, and transitioned to curbside pick-up of online orders, due to COVID-19. Management admits that the coronavirus hurt the company's fiscal first quarter (ended May 2, 2020) results, and it expects an even more significant effect on its second-quarter performance (ending Aug. 1, 2020).

While the pandemic and subsequent interruption to its operations caused the company to push back its first-quarter results announcement by about six weeks to July, Macy's did provide some preliminary information. Its sales fell by approximately 45% to around $3 billion, and management expects an operating loss of $905 million to $1.1 billion compared to a $203 million operating income in the year-ago period.

It started reopening stores a month ago, but management stated that the stores experienced a 50% year-over-year drop in demand over the first few weeks of May. With the lost sales during the quarter, inventory built up, and management will have to discount its goods to move the merchandise. This will hurt Macy's gross margin in the second quarter.

The company continued opening stores throughout May, starting with 68 at the start of the month, and it had 270 fully operating by Memorial Day. Other than stores reopening, Macy's, like other retailers, has not had much good news lately. No wonder the stock price is down more than 50% since late February. Before jumping in, it is important to ask yourself if this represents a buying opportunity, since not all stocks that drop so much are a good investment.

A mannequin with racks of clothes on both sides.

Image source: Getty Images.

Trouble before the coronavirus

Macy's, which operates its namesake stores, Bloomingdale's, and Bluemercury (a luxury beauty products retailer), had its share of troubles before COVID-19 caused widespread store shutdowns. As part of its strategy to stabilize and then drive profitable growth, last year the company announced it would close 30 of its "least productive" stores, upping the total to 125 over the next three years.

In two out of the last three years, the company reported negative same-store sales (comps), including last year's negative 0.8%. During that same period, operating income has fallen from $1.9 billion to $970 million.

The company faces a host of challenges, including from online competitors. Management's strategy includes spending money to upgrade its websites and mobile apps. Digital sales were 26% of fiscal 2019's sales, up from 22% in fiscal 2017, but there is still a long way to go before online shopping becomes a major part of Macy's business.

Economy dampens outlook

Already confronting challenges heading into the pandemic, Macy's is facing a tough economy with high unemployment. While businesses are reopening across the country, nobody knows how long it will take for companies to begin hiring.

With its three brands appealing to a more upscale customer, Macy's results are sensitive to the overall economy. During the last recession, comps fell 4.6% in 2008 and 5.3% in 2009.

When the pandemic caused widespread stay-at-home orders and Macy's shut its physical locations, management took drastic but necessary steps. These included withdrawing guidance, furloughing workers, and cutting spending and capital expenditures. The CEO and board of directors agreed not to take any cash compensation while the COVID-19 crisis was going on. Macy's also suspended its dividend, which is understandable.

None of these moves, particularly not paying a dividend, fill me with confidence, however. I would feel better about investing in Macy's if the company wasn't confronting strong online competition, and the economy was on a stronger footing. The upshot is that I would not place this stock on your shopping list.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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