Macy's (M 0.16%) became a hot topic again on Wall Street following the release of its second-quarter earnings report on Aug. 23. The department store chain's net sales dipped 1% year over year to $5.6 billion, but still beat analysts' estimates by $100 million. Its comparable store sales fell 1.5% on an owned basis and declined 1.6% on an owned plus licensed basis.

Macy's adjusted net income fell 33% year over year to $277 million, or $1.00 per share, which also beat the consensus forecast by $0.12. Its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) dropped 26% to $616 million, and its adjusted EBITDA margin slipped from 13.3% to 11%.

A Macy's Store in Rancho Cucamonga, CA.

Image source: Macy's.

Macy's then trimmed its full-year guidance. It had previously expected its net sales to grow 0%-1%, its adjusted EBITDA margin to slip from 13.6% in 2021 to 11.2%-11.7%, and for its adjusted EPS to drop 7%-15%. But now it expects its net sales to stay nearly flat, its adjusted EBITDA margin to decline to 10.5%, and its adjusted EPS to slide 21%-25%.

That outlook was grim, but Macy's stock price still rose nearly 4% after that earnings release -- presumably because it cleared Wall Street's low bar. Macy's stock certainly looks cheap at less than five times this year's earnings and pays a forward yield of 3.3%, but is it actually worth buying right now?

What happened to Macy's?

Macy's had already been struggling before the pandemic started. It was a textbook victim of the retail apocalypse -- its stores were anchored to dying malls, it lacked a competitive edge against fast fashion retailers, superstores, and Amazon, and it had over-expanded its brick-and-mortar presence while neglecting its e-commerce platform.

Its net sales fell 2% in 2019 as its comps declined 0.8% at its owned stores and 0.7% at its owned-plus-licensed stores. Its adjusted EPS plunged 30% as it tried to boost its sales with markdowns.

To address that slowdown, Macy's launched its "Polaris" three-year turnaround strategy in early 2020. It pledged to shut down its weaker stores (especially in dying malls), open more stand-alone stores, strengthen its private-label brands, expand its Star Rewards loyalty program, accelerate its digital growth, and rein in its costs. However, the pandemic started right after it kicked off those plans.

Has Macy's stabilized its business?

In 2020, Macy's net sales plunged 29% and it turned unprofitable as it temporarily closed its stores. However, it continued to expand its digital channel and cut costs throughout the crisis.

At the end of that year, it claimed it could generate $10 billion in sales from its digital channels in 2023 -- which would account for more than 40% of its estimated sales. It also said it would open dozens of new Backstage stores, which would widen its moat against The TJX Companies in the higher-growth off-price market and offset the slower growth of its namesake banner.

But just as the pandemic-induced headwinds eased, new macro challenges like inflation and supply chain disruptions started to emerge. Yet Macy's business gradually stabilized. In 2021, its net sales rebounded 41% from 2020 and stayed nearly flat from 2019. Compared to 2019, its owned comps rose 3.1% and its owned-plus-licensed comps grew 3%. Its digital sales accounted for 33% of its top line, and it returned to profitability as it cut costs and shut down its weaker mall-based stores.

However, Macy's reduced guidance indicates that momentum will fade in the second half of this year as cash-strapped consumers spend less money on apparel and other discretionary items. To counter that slowdown, it expects to rely on heavier markdowns to stabilize its inventories.

Is Macy's a deep value dividend play?

At less than five times forward earnings, Macy's is cheaper than Kohl's (KSS 4.53%), which trades at six times forward earnings but arguably faces much tougher near-term headwinds. It's also cheaper than Target (TGT 1.28%), which trades at 18 times forward earnings. Target is growing faster than Macy's, but it faces a much tougher post-stimulus slowdown and is struggling to reduce its inventory levels.

Macy's suspended its dividend during the onset of the pandemic to conserve cash in 2020, but reinstated it last year. Its current yield translates to a payout ratio of just 15% (based on Macy's adjusted EPS forecast for the full year), so it still has plenty of room for future dividend hikes.

Macy's looks like an undervalued dividend stock, but it's not a compelling buy because its revenue and earnings will likely continue to decline for the foreseeable future. It's faring better than Kohl's or Bed Bath & Beyond, but it's still a mediocre house in a bad neighborhood.