In today's stock market, department stores aren't exactly what comes to mind when asked to discuss the hottest stocks. That slot is typically reserved for artificial intelligence (AI), which is proving to be massively disruptive to society. New Berkshire Hathaway (BRKA -0.15%)(BRKB -0.21%) CEO Greg Abel, for instance, has not shied away from this trend. Under Abel's leadership, Berkshire has spent tens of billions of dollars over the past year buying stock in AI giant Alphabet.
But in the second quarter, Berkshire also spent time purchasing several other stocks, including a legacy department store with little connection to AI. Does Abel know something that Wall Street doesn't?
Image source: The Motley Fool.
'A Bold New Chapter'
In the second quarter, Berkshire more than doubled its position in Macy's (M +1.06%). The position remains small, valued at roughly $173 million at the end of the second quarter and accounting for 0.1% of Berkshire's massive portfolio.
It's easy to see why investors might be glossing over Macy's, but the company has been focused on a turnaround strategy called "A Bold New Chapter," which began in 2024 and has three major parts.
The first involved revamping the company's footprint, including closing 150 locations that were no longer productive and investing in roughly 350 stronger-performing stores to make them even more appealing to customers.
The second part of the strategy involved focusing more on Macy's luxury brands, such as Bloomingdale's and Bluemercury, which have been strong performers. This means adding new stores under these brands and remodeling some existing ones.
The final part of the turnaround includes streamlining back-end operations, such as the company's supply chain asset portfolio, and creating a scalable technology platform.
Macy's efforts have paid off. In the first quarter of its fiscal year 2026, the company posted its best comparable sales growth in four years. Reimagined store locations saw 2.4% year-over-year growth and have now posted positive annual growth in eight of the last nine quarters.
Bloomingdale's reported 10.2% year-over-year growth, the highest first-quarter growth in Macy's 154-year history. Macy's has also developed an Ask Macy's AI-powered assistant to drive higher conversion online. The market seems to like the results, with the stock up roughly 78% in the past year.
Macy's now trades at 10.5 times forward earnings.
NYSE: M
Key Data Points
While Abel is buying, Wall Street thinks it's time to pump the brakes
The strong run has led most Wall Street analysts to press the pause button.
Of the 10 analysts who have issued research reports on Macy's over the past three months, one still has a buy rating, eight recommend holding, and one recommends selling. The average price target implies about 4.5% downside from current levels (as of Aug. 20), according to TipRanks.
Some of this reserve among analysts likely stems from concern about consumers and whether they can maintain spending levels amid elevated inflation.
While it's tough to know exactly why Abel or Berkshire's Executive Chairman and former CEO, Warren Buffett, are buying the stock, it likely has to do with the fact that Macy's has executed on its turnaround plan, trades at a relatively low valuation, and is not overly levered with debt.
Furthermore, Macy's is returning ample amounts of capital to shareholders. The company has a roughly 3.3% trailing dividend yield, which appears easily covered by free cash flow.
In the first quarter, I estimate Macy's generated $115 million of free cash flow, including capitalized software expenses, while annualized dividends were only $200 million. In fiscal 2025, I estimate Macy's had $690 million of free cash flow, including capitalized software expenses.
Macy's is also buying back stock while it's inexpensive, and it still has $1.1 billion remaining under its share repurchase authorization.
These are the ingredients Buffett has historically looked for: a strong brand, a business finding its footing, free cash flow generation, and the return of a lot of money to shareholders. As I mentioned, Macy's is a relatively small position for Berkshire that won't hurt the company, regardless of what happens.
