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Smart Investors Avoid Macy's No Matter How Good the Price

By Lawrence Rothman, CFA - Dec 30, 2020 at 12:45PM

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Macy's continues to confront stiff competition.

Macy's ( M -4.63% ) shareholders have had a rough go of it going back several years, with the share price down by 66% over the last five years. While some investors may feel tempted to jump in, viewing this as a value stock, you should resist the temptation to buy while waiting for the price to get to its intrinsic value.

After all, the stock is down for good reasons, and I fear this is a value trap. This is when a company's stock price doesn't appreciate significantly due to larger or underappreciated issues. This is the case with Macy's.

Let's examine why you should avoid the stock.

A graph with the words Bear Trap and Bull Trap at different points.

Image source: Getty Images.

Intensifying competition

Macy's faces a lot of competition from brick-and-mortar and online retailers that are vying for the same customers. The department store operator, which includes its namesake brand and Bloomingdale's, offers a broad range of merchandise.

It hasn't fared well over the last few years. This includes losing market share to off-price retailers like TJX Companies' ( TJX -2.00% ) T.J. Maxx, Marshalls, and HomeGoods stores. Online giant Amazon ( AMZN -1.81% ) has also increasingly encroached on Macy's territory, including with apparel offerings.

In response, management launched a three-year plan in 2017 designed to have Macy's remain relevant and boost sales. It designed the North Star strategy to push the company's omnichannel approach, providing offerings exclusive to the company, and making decisions on real estate like expanding its off-price stores.

These steps didn't do well enough to boost Macy's top line, with negative same-store sales in 2017 and 2019. Its operating income under U.S. GAAP fell by nearly 50% over that same period, to $970 million.

However, management launched a new strategy, Polaris, in February. Will this turn around the company's fortunes?

An updated strategy

The latest plan also pushes digital initiatives and the omnichannel experience. Additionally, Polaris focuses on customer loyalty through its reward program, a new merchandising strategy that pushes different areas such as big-ticket items, luxury, and off-price selections, and seeks to take $2 billion of out its cost structure by the end of 2022.

In terms of its stores, management is planning to close 125 and looking at opening new ones away from malls in an attempt to gain customers who are eschewing big shopping centers.

The cost savings portion is easy to accomplish, and Macy's is making progress. In the fiscal third quarter (ended Oct. 31), selling, general, and administrative expenses were down by about 28% to $1.7 billion. The pandemic also forced people to shop online and avoid the stores, and digital sales increased by 27%.

However, with all of Macy's stores reopened to the public, the period's sales were down by 23% to $4 billion.

Certain categories like home furnishings were particularly strong. However, this was due to COVID-19 causing people to stay in the house. Other areas, notably apparel, were weak, as people needed less work clothing. While this could bounce back, you should remember that consumers have a wide number of retailers from which they can choose.

Granted, its updated strategy couldn't have come at a worse time. But even if the vaccines get widely distributed and are effective, as everyone hopes, Macy's still confronts a lot of competition. Perhaps it can succeed, but the retail sector is littered with companies that have failed to reinvigorate their businesses. That's why you should avoid the stock, even though the price is way down from a few years ago.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$27.18 (-4.63%) $-1.32
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$3,443.72 (-1.81%) $-63.35
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
TJX
$68.01 (-2.00%) $-1.39

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

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