Macy's (M 1.44%) stock soared after the company reported fiscal third-quarter earnings on Nov. 18. The company has done a masterful job bouncing back from the disruptions caused by the coronavirus pandemic.
And even with the deadly virus still in circulation, third-quarter revenue was higher than in the same period of 2019, before the outbreak. That was one of a few promising signs for Macy's shareholders and potential investors. Let's dig a little deeper into the latest results.
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Macy's digital business is so good it might be worth selling
Interestingly, Macy's added 4.4 million new customers in the quarter ended Oct. 31. That's up 28% on a two-year basis. Consumers were already shopping less frequently in person, even before the pandemic, but COVID-19 drove more people to appreciate the convenience of online shopping, further threatening the long-term prospects for traditional malls, shopping centers, and other brick-and-mortar retailers. Macy's was slow to adapt and fell victim to this trend in the years before the outbreak.
However, the pandemic forced the retailer to emphasize its digital business as its physical stores closed temporarily. The adjustment is paying off -- 41% of those new customers connected with Macy's online. And those customers are spending with digital sales up 19% year over year (and 49% over 2019).
Moreover, investments in the online business have made Macy's physical stores a more valuable asset too. In the latest quarter, online sales were three times higher in the regions where Macy's had a physical store. Online shopping is more convenient, but one drawback is the returns process. Having a store nearby reduces that friction to some degree as customers feel they can return or exchange items locally.
The strong emergence of Macy's online business during the pandemic gives investors hope the company can turn around its declining revenue trend. Either that, or Macy's can harvest the value from its online business in another way -- by selling it. In the earnings call, management said it was considering various avenues that would unlock the value of its e-commerce business.
Macy's stock is in style
Overall revenue in the fiscal third quarter came in at $5.44 billion, up from $5.17 billion two years ago. Meanwhile, selling, general, and administrative expenses declined from $2.20 billion to $1.98 billion over the same period. Management made permanent cost-saving decisions at the onset of the pandemic, and the company has maintained its discipline as revenue has recovered. That's all resulted in improved profits. Indeed, Macy's raised its fiscal 2021 adjusted earnings-per-share outlook to a range between $4.57 and $4.76, up from $3.41 to $3.75.
There is plenty to like about Macy's going forward. And the stock is trading at a price-to-free cash flow ratio of just 9.1, near the lowest levels of the past decade. The retailer is looking attractive at these levels.
