What happened
Shares of department store owner Macy's (M -2.68%) popped 27.3% this week, according to S&P Global Market Intelligence. The retailer posted solid first-quarter results that were above analyst expectations and reiterated its full-year guidance. At one point, the stock was up 30% this week.
So what
On May 26, Macy's reported its quarterly earnings for the first three months of 2022. Revenue was $5.35 billion in the period, up from $4.71 billion a year ago, driven by comparable-store sales of 12.8%. Adjusted earnings per share (EPS) was $1.08, up from $0.39 a year ago. Both numbers beat analyst expectations going into the results, which is why Macy's stock popped the day of the release.
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With its low earnings multiple, Macy's executives are buying back stock at an aggressive rate. The team repurchased $600 million worth of stock in Q1 and has a plan for $2 billion in open-ended repurchases. At a current market cap of $6.6 billion, shares outstanding could come down by a significant amount if management is able to repurchase $2 billion worth of shares at the current price.
Macy's reiterated its guidance for full-year revenue just below $25 billion and adjusted EPS of between $4.53 and $4.95. At the high end of this guidance, Macy's trades at a forward price-to-earnings ratio (P/E) of 4.7 based on its current stock price of $23. This is quite cheap compared to the market's average earnings ratio of 21, indicating investors don't believe Macy's current earnings power is sustainable. If you disagree, the stock could be a buy right now.
Now what
Anyone interested in Macy's stock needs to evaluate whether they believe in the long-term viability of this business. With such a low earnings multiple, all the company needs to do is sustain its current earnings power and investors will be well rewarded. The company has been able to do this over the last decade, with both revenue per share and free cash flow per share up from where they were 10 years ago. However, there are a lot of competitors in the fashion, apparel, and luxury space with online companies like Revolve Group trying to take many of Macy's younger customers.
Investors also need to watch Macy's debt load. It has $3 billion in long-term debt and $3 billion in long-term lease liabilities, which could be a burden on cash flow in the coming years. The debt doesn't start coming due until 2027, so it isn't a short-term concern, but it is something to watch nonetheless. If you believe Macy's can manage these liabilities while keeping up its current earnings power, now could be a good time to buy the stock, even with it up almost 30% this week.
