Walmart (WMT -0.32%) had bad news for investors on July 25. The company said it is slashing prices to move products that customers no longer desire. One category in particular it called out as falling out of favor: apparel.
It's certainly bad news for Macy's (M 0.10%) shareholders to hear that consumers are pulling back on buying clothes. The category is a large percentage of Macy's overall sales, so the update from Walmart is concerning, to be sure. Let's look closer.
Macy's may need to offer discounts to compete
Here is the full comment from Walmart CEO Doug McMillon in the press release on July 25:
The increasing levels of food and fuel inflation are affecting how customers spend, and while we've made good progress clearing hardline categories, apparel in Walmart U.S. is requiring more markdown dollars. We're now anticipating more pressure on general merchandise in the back half; however, we're encouraged by the start we're seeing on school supplies.
Walmart is a massive company with $573 billion in sales in its most recent fiscal year. If it is identifying a consumer trend, the same trend is likely to affect all businesses. Unfortunately for Macy's investors, that probably means folks are spending less than expected at the clothing retailer.
Macy's has recovered nicely since the devastation at the initial phase of the pandemic when it was forced to close its stores to in-person shoppers. Revenue fell by 29% in its fiscal 2021 before rebounding by 39.8% in the following year. Since most companies faced inventory shortages until recently, Macy's benefited by selling more of its full-price inventory.
M Revenue (Annual YoY Growth) data by YCharts.
The news from Walmart suggests those good times are over. Lower prices for clothing at Walmart will make it harder for Macy's to sell products at full prices. Moreover, Walmart had $61 billion in inventory as of April 30. That means it will take longer than a week or two of sale prices to bring that figure to normalized levels.
Macy's will likely need to offer more discounts to compete. Admittedly, Macy's sells to a more affluent customer who may not consider shopping for clothes at Walmart, but that is not true of all Macy's customers. Some of them will surely be enticed by markdowns at Walmart.
Therefore, it's understandable that Macy's stock was down 7% on the day following the announcement from Walmart.
No reason to sell Macy's stock
While this was bad news, to be sure, it is not reason enough to sell Macy's stock. The company made significant cuts at the pandemic's onset to operate leaner. When sales reached $25.3 billion in its fiscal year that ended in early 2022, its operating income totaled $2.3 billion. Compare that to its fiscal year of 2019, before the cuts, when it made sales of $25.7 billion and only earned an operating income of $1.5 billion.
M Price to Free Cash Flow data by YCharts.
Further, the stock is inexpensive. Macy's is as cheap as it's been in the last five years, selling at a price-to-earnings ratio of 3.2 and a price-to-free-cash-flow multiple of 3.0.
