Please ensure Javascript is enabled for purposes of website accessibility

Is Macy's Stock a Buy After Q1 Earnings?

By Parkev Tatevosian - Jun 2, 2021 at 7:48AM

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

The company reported a surprise profit in the first quarter.

Macy's (M 2.20%) benefitted from the American Rescue Plan, that saw over $300 billion in stimulus checks sent to consumers in March and April, by reporting a better than expected first-quarter on May 18. Wall Street analysts were expecting improvement from the retailer compared to last year when its stores were shut, but few were expecting this level of performance.

Let's look at the most recent quarter and dig a little deeper to determine if Macy's stock is a buy right now. 

A woman shopping at a department store.

Image source: Getty Images.

Better-than-expected first-quarter results 

Overall revenue increased by 56.6% from last year to reach $4.7 billion in the first quarter. In addition to stimulus checks hitting bank accounts, consumers felt more comfortable leaving their homes as the risks of contracting COVID-19 are trending downward in the U.S.

Decreasing COVID risks mean people are getting back to physically checking out stores and experiencing the familiarity of buying clothes in-store, after spending several months indoors and shopping online. That, in addition to more pre-pandemic habits, such as going out with friends and throwing birthday parties, should continue to be a tailwind for retailers such as Macy's for the rest of the year. The New York-based retailer seems to be foreseeing this trend and could be why it has raised revenue and profit guidance for 2021.

For this fiscal year, revenue is now expected to increase by 26.5% at the midpoint; previously, the expected increase was 17% at the midpoint. More importantly, adjusted earnings per share are now expected to be $1.91 at the midpoint versus previous expectations of $0.65.  

Should you buy Macy's stock?  

Macy's stock was trading for roughly $16 per share in the days and weeks before the onset of the coronavirus pandemic. As of this writing, the stock is trading at $18.43. In other words, Macy's is in a better position than it was before the pandemic. For instance, it closed some of its worst-performing locations and opened more of its popular off-price stores. 

Further, the company is making a strong effort in boosting digital sales, which in the most recent quarter was 37% of overall sales.

Also, at the onset of the pandemic, Macy's and its competitors significantly reduced new inventory orders. That allows it to sell more of its products at full price and do so without needing to advertise as much as it did pre-pandemic.

In fact, its adjusted EBITDA margin was higher in the most recent quarter than the comparable quarter in 2019. Macy's is certainly operating more efficiently now than it did before the pandemic. And while Americans increased spending after receiving stimulus checks in March and April, they saved a lot of that money as well, which could fuel higher spending at Macy's for several more quarters.

A chart of Macy's forward price to earnings ratio.

Data source: YCharts.

Macy's stock is trading at a forward price to earnings ratio of 8.5 (see chart). That's up from just below 7 earlier in 2021. That could indicate that the market has already priced in the short term positive effects of the rebound from pandemic lows. 

I should point out, also, that Macy's long-term prospects might not be as favorable. The secular shift away from brick-and-mortar shopping to e-commerce could be a headwind for Macy's for several years. Still, its efficiency improvements could generate solid earnings even as revenue stays relatively flat over the long run. Macy's stock appears to be cheap, but it's cheap for a reason. Investors should tread with caution toward this retail stock.

 

Parkev Tatevosian owns shares of Macys. The Motley Fool has no position in any of the stocks mentioned. 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
$19.96 (2.20%) $0.43

*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
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/14/2022.

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.