Earlier this month, Macy's (M +4.73%) reported that sales beat the high end of its guidance range by about 10% in the first quarter of fiscal 2021. This helped drive a huge earnings beat. Excluding asset sale gains, adjusted earnings per share actually surpassed the company's Q1 2019 performance.
Despite these surprisingly strong results, many analysts and retail pundits continue to take a dim view of Macy's. However, recent commentary by executives at Macerich (MAC 1.63%) -- one of the biggest mall owners in the U.S. -- suggests that Macy's post-pandemic recovery is just beginning.
Skepticism abounds
Macy's stock has quadrupled since bottoming out last spring and now trades for a little more than its pre-pandemic price. Many Wall Street analysts view this as an overreaction. The average Wall Street price target is barely higher than Macy's current stock price, and bears far outnumber bulls within the analyst community.
Macy's stock performance, data by YCharts.
Retail pundits hold similar views. Most of the experts who contributed to a recent RetailWire discussion about Macy's first-quarter results doubt that the company can sustain its recent success. Several noted that while Macy's sales surged 56% year over year last quarter, total sales still fell 14.5% compared to the first quarter of fiscal 2019.
Other experts suggested that pent-up demand could boost revenue in the near term but would eventually subside. Still others pointed to the risk that demand will fade as stimulus programs wind down.
Promising data points from a big mall owner
While Q1 sales exceeded management's expectations, the quarter started off slowly. Foot traffic and in-store sales improved dramatically starting in March.
If sales trends remain in line with March/April levels, that alone would imply sequential acceleration compared to the first quarter, which was weighed down by lower sales in February. Sure enough, second-quarter guidance calls for sales to decline about 10% to 12% from 2019 levels: better than last quarter's 14.5% decrease.
Image source: Macy's.
Furthermore, store traffic isn't returning uniformly across the country. Macerich -- which owns nearly four dozen U.S. malls, many anchored by Macy's -- recently noted that portfoliowide tenant sales (excluding food and beverage tenants) exceeded 2019 levels by 2% in the first quarter. However, tenant sales jumped 11.5% on that basis in Arizona, which had fewer retail restrictions than many of Macerich's other markets.
Even as other states began loosening retail restrictions in March, Arizona's outperformance continued for Macerich, with tenant sales soaring 18% over March 2019 levels for the month (again excluding food and beverage concepts). In short, pent-up demand has driven a surge in retail traffic and sales in Sun Belt states like Arizona in recent months. Similar levels of pent-up demand likely exist in other regions, but they haven't been fully unleashed yet.
This is particularly significant because, like Macerich, this business is heavily concentrated in the Northeast and along the West Coast. With states in those regions now reopening, Macy's and Macerich could both benefit from a big acceleration of retail foot traffic in those markets.
Image source: Author.
More tailwinds on the way
A rebound in store traffic in key states like California and New York should help Macy's get closer to its 2019 sales volume.
Economic reopening will also help the top department store chain in a second way: As offices reopen, demand for work attire -- which has remained low so far -- should bounce back. That's a key market segment for Macy's.
Finally, Macy's usually gets 3% to 4% of its annual sales from international tourists. Travel restrictions have virtually eliminated that source of revenue. However, international tourism to the U.S. may start to recover later this year, adding to the company's momentum heading into 2022.
First-quarter sales rebound surprised management, analysts, and most investors. But considering all the factors that were still weighing on its sales last quarter, the sales recovery is likely to strengthen further as 2021 progresses -- with further upside next year -- rather than petering out as the skeptics expect.
