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Macy's Crushes Earnings, Reinstates Dividend, and Announces Toys R Us Deal

By Parkev Tatevosian, CFA – Aug 25, 2021 at 12:00PM

Key Points

  • Macy's will add 400 Toys R Us stores inside its existing locations.
  • The copmpany will restart its dividend at $0.15 per share quarterly.
  • Adjusted earnings per share of $1.29 far exceeded management's guidance.

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A reopening economy led Macy's to have one of its best quarters ever.

Macy's (M -0.70%) announced fiscal second-quarter earnings results on Aug. 19 that impressed investors. Its stock price is over 30% as of this writing as investors process the positive news.

Overall, the company reported better-than-expected earnings per share, reinstated a dividend, announced a deal with Toys R Us, and more. Let's take a closer look at Macy's latest results.

A person looking a baby clothing in a store.

Macy's stock is up almost 100% this year. Image source: Getty Images.

Macy's is turning things around

In the fiscal second quarter, Macy's reported adjusted earnings per share of $1.29. That figure was substantially higher than the range of $0.03 to $0.12 that management previously provided for its outlook.

Cost savings the company implemented during the pandemic combined with the robust return of in-store shoppers to boost earnings for the retailer. The excellent results gave management enough confidence to reinstate the company's dividend. The quarterly payout will start at $0.15 per share, and it should increase over time. Macy's previously suspended its dividend at the pandemic's onset to conserve cash. With $2.1 billion of cash on the balance sheet as of July 31, however, management believes it is time to again return cash to shareholders.

CEO Jeff Gennette said during the earnings call:

We are generating a significant amount of cash, and this financial flexibility allows us to simultaneously invest in our business and pursue significant actions to return capital to shareholders. We are reinstating our quarterly dividend, and our board has authorized a $500 million share repurchase plan. And earlier this week, we used cash to repay our $1.3 billion secured senior notes.

Securing a partnership

Macy's also announced a partnership with Toys R Us. Once a leading seller of toys and games, the retailer filed for bankruptcy in 2017, closing down its brick-and-mortar U.S. operations. But Macy's will bring the toy brand inside 400 of its stores in 2022, and Toys R Us products will be available at Macys.com.

The department store chain has an existing presence in toys through its off-price Backstage locations, though its market share in the category remains small. However, management has seen rapid growth for its toy sales in the past few years, and the Toys R Us partnership can help bring more foot traffic into Macy's stores during key periods like the holiday shopping season.

What this could mean for shareholders

Macy's stock is up 30% and still climbing following the earnings announcement. These latest gains have pushed its year-to-date return to over 100%. The company has recovered nicely from the depths of the pandemic. Moreover, streamlined operations and cost reductions put in place over the past year should benefit the business for years to come.

Management updated its long-term adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin target, saying it can now achieve low double digits starting next year. That means Macy's is not only recovering from the pandemic, it is emerging stronger than before.

Following the recent rally, the stock is trading at a forward price-to-earnings ratio of 6.7, the highest level it has reached in the past year. While there may be room to go higher, Macy's has already had an excellent run so far in 2021. Cautious investors may want to wait for the post-earnings dust to settle before accumulating shares in this retailer.

Parkev Tatevosian owns shares of Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Macy's Stock Quote
Macy's
M
$22.53 (-0.70%) $0.16

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