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.
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.
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.