Macy's (M -0.70%) was devastated at the onset of the coronavirus pandemic. To help slow the spread of the potentially deadly virus, Macy's was forced to close all its locations to in-person shoppers. The sudden halt was unprecedented and caught management off-guard. Sales cratered, and the company had to adapt quickly or risk running out of money.
Macy's is arguably a stronger business now than it was before the start of the pandemic. Management can be commended for decisions it made during the crisis. The market might agree with the previous statement -- Macy's stock is up 121% year to date. After such a rise upward, is Macy's stock still a buy?
Macy's improvements are paying off
It's important to note that while Macy's stock surged in 2021, it is still down 11% over the previous three years. Macy's overall revenue fell in three out of the four years preceding the outbreak. That highlights that there were troubles with Macy's not attributed to the pandemic. Instead, Macy's was slow to adapt to changing consumer habits. Folks wanted to shop online, and Macy's operated brick-and-mortar retail locations -- there was a mismatch.
One of the solutions has been a reduction in store count. From third-quarter 2014 to Q3 2021, the number of Macy's physical locations shrank from 840 to 732. Of course, management does its best to select underperforming stores to close and encourages customers in the area to shop on its website or at the next closest location. Still, overall sales have fallen from $27.9 billion in 2014 to $25.7 billion in 2019. Figures ending 2019 better reveal the changing consumer behavior before pandemic-related disruptions.
The outbreak of COVID-19 forced management into additional changes. It increased its focus on its digital channel, reduced expenses even further, and embraced third-party sellers on its website.
As a result, digital sales make up a larger share of overall sales at Macy's. In its most recent quarter, digital sales as a percentage of overall sales reached 33%, up from 23% in 2019. Macy's has gone out and met customers where they are. That has undoubtedly played a large part in Macy's third-quarter sales surpassing the comparable quarter in 2019.
Moreover, the cost-cutting measures Macy's put in place led to increased profits. In the 39 weeks ended Oct. 30, Macy's has earned net profits of $687 million -- more than triple the $224 million it earned in the same time in 2019. It might be too early to make this conclusion, but Macy's looks like a better business now than it did before the pandemic.
Macy's stock is not cheap
According to Macy's price-to-free cash flow, price-to-sales, and price-to-earnings ratios, the stock does not appear to be expensive or cheap. Instead, it's trading at roughly average levels compared to the previous five years. One way to interpret that can be to say that it's a good buy because the business is in better shape, but it's selling at relatively the same price it was before improvements. The other is that the advances have not shown effectiveness outside of a pandemic economy; therefore, Macy's profitability may revert as the U.S. evolves.
Regardless, Macy's management has proven skillful in handling a crisis, and the business is no doubt in better shape, even if it's already priced into the stock. However, it's too early to consider these improvements long-lasting, so investors should give Macy's a little more time to prove that before buying shares.