Please ensure Javascript is enabled for purposes of website accessibility

1 Retail Stock to Avoid No Matter What

By Lawrence Rothman, CFA – Updated Jul 8, 2020 at 3:22PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Macy's has been confronting major issues beyond the coronavirus pandemic and the economic fallout.

It is easy to excuse Macy's (M -0.44%) poor fiscal first-quarter results (the period that ended on May 2) as victims of the pandemic. Sales dropped by 45% year over year to $3 billion because stores were closed for about half the quarter. However, digital sales, which should have seen growth, experienced a high-single-digit-percentage decline.

Macy's stock has lost about 90% of its value over the last five years, clearly demonstrating that the retailer was facing major challenges even before COVID-19 forced store closures. Given the stock's history of decline, I suggest bypassing these shares. Here's why.

An empty mall.

Image source: Getty Images.

Intense competition

Although Macy's is a major department store operator with the well-known namesake and Bloomingdale's brands under its umbrella, its business has suffered for several years. In two out of the last three years, the retailer had negative same-store sales (comps), including last year, when the figure fell by 0.8% at owned stores.

One of the serious issues Macy's has been confronting is strong online competition that provides cheaper goods and fast delivery. Naturally, this includes Amazon.com, which has encroached on Macy's territory, including its apparel offerings.

Management's attempt to fight back has included a three-year plan launched in 2017 that set out to push an omnichannel approach (including a mobile app), and digital sales grew from 22% of sales in 2017 to 26% last year. However, the plan did not drive increased profitability. Macy's GAAP operating income fell from $1.9 billion in 2017 to $970 million last year.

More recently, Macy's came out with its Polaris Strategy, a new three-year plan that it announced in February. It aims to strengthen customer relationships, refocus merchandise with a particular emphasis on private-label goods, push digital growth, close stores, and cut costs.

Shutting 125 underperforming stores and slashing expenses is possible almost anytime. However, the other steps are more challenging, particularly with COVID-19 delaying a turnaround. The virus caused management to evaluate which parts of its plan to escalate and which to let lag.

No dividend

Macy's decided to suspend its quarterly dividend, an understandable step many other companies have taken recently. But it does mean that shareholders, who had gotten a constant payment for four years, no longer get a cash payout. Conserving liquidity through steps like furloughing employees, laying off nearly 4,000 employees, and pushing back the timing of expense payments, the company doesn't appear likely to resume dividend payments anytime soon.

Macy's performance was lacking over the last several years when the economy was humming along. Now the company, which appeals to a higher-income customer, will feel the effects of the recession. During the previous downturn, its comps fell 4.6% and 5.3% in 2008 and 2009, respectively.

Unfortunately, there are deeper issues than just the current state of the economy. Macy's is confronting intense online competition, and it faces major headwinds in getting back on track. The risks the company faces in turning around its operations are just too great right now to make the stock attractive.

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: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$15.72 (-0.44%) $0.07
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$113.78 (-3.01%) $-3.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.