Management permanently slashed expenses, emphasized its digital sales channel, and mimicked a strategy that worked well for Amazon. The successful moves gave management the confidence to boost Macy's long-term profit margin target. Still, the recovery from the pandemic is not complete, and two more catalysts could send the stock even higher.
1. The return of international travel
International tourism historically accounted for 3% to 4% of overall revenue for Macy's. The sector is still hampered by travel restrictions and inconveniences that make it difficult for folks to travel from one country to another.
Further, with coronavirus infections soaring in the U.S., visitors from other countries are discouraged from booking trips. Macy's management does not expect these constraints to ease anytime soon. However, it will be a nice tailwind for the department store retailer when international travel returns, potentially boosting revenue by low single digits. Here is what CEO Jeff Gennette said on the matter in the company's Q2 conference call:
But I would tell you on balance all of our city stores are still suffering from a lack of that traffic in that historical volume. So again, that will be a tailwind for us in the future as the [COVID-19]variants play out.
2. Workers going back to offices
At the pandemic's onset, millions of employees were sent home to work remotely. The trend is hurting sales in Macy's urban stores that benefit from folks shopping during their lunch hour or even after work before commuting home.
The return to office work will be another tailwind for Macy's if or when it happens. The rise of the delta variant has led many businesses to extend employee return dates further than expected. Before this latest surge of infections, several large corporations planned for a September return. Those plans were scrapped and replaced with a hodgepodge of dates and policies.
Moreover, many corporations will keep remote work as an option for at least part of the week. So when employees do return to the office, it will not be for a full week. That will give Macy's fewer opportunities to attract professionals to its stores. Regardless, getting people out of their homes and commuting to work will boost sales at Macy's, even if the effect is muted.
Although the impact of these catalysts may appear small on the surface, keep in mind that Macy's compounded annual growth rate in revenue was negative 3.2% over the last decade. Shareholders would be pleased with the company if it can reverse that trend and grow at a 3% rate over the next decade.
Impressively, Macy's has recovered from the lost revenue during the pandemic. Its most recent quarter reported that comparable-store sales increased by 5.8% from the same quarter in 2019. The metric, which measures sales growth in stores open at least 12 months, is more informative when compared with 2019 because the pandemic distorted sales figures in 2020.
Therefore, if these two catalysts can add low-to-mid single-digit revenue growth on top of that increase, it could send the stock even higher.