Don’t Buy Macy’s Until These 3 Things Happen
Macy’s (NYSE: M) stocks may look tempting after losing 61% year-to-date. With the holidays ahead, we might expect an increase in sales – and possibly the share price. But make no mistake about it. The department store chain is not yet out of the woods.
Before the coronavirus outbreak, Macy’s was already grappling with issues such as declining mall traffic and online competition. After the global coronavirus outbreak, Macy’s faced new challenges, including temporary store closures and consumers’ focus on stocking essentials, rather than buying clothes or jewelry. While the health crisis is not over, stores have reopened and traders are trying to adapt to today’s customers. Ultimately, we could bet on Macy’s recovery. But don’t get started just yet until these three things happen.
International travel resumes
Macy’s flagship store on Herald Square in Manhattan, and even some of its stores in other major cities, rely on tourism. In the company’s second quarter earnings report, she cited the decline in international tourism from COVID-19 as one of the headwinds it continues to face.
As a perspective, international tourist arrivals to the Americas fell 55% in the first half of the year, according to the United Nations World Tourism Organization. This shouldn’t be surprising since many countries have restricted travel during this time as the coronavirus outbreak has turned into a pandemic. And in accordance with the lockdown restrictions, Macy’s and other retailers have temporarily closed their stores. However, the resulting drop in travel during this period is not the main problem.
The biggest concern is that, as the health crisis continues to drag on and economies stagnate, international tourism will not rebound overnight. In fact, the UN report estimates that it would take two and a half to four years for international tourism to return to 2019 levels. That doesn’t mean you have to wait that long to buy Macy’s stock, but it does. is rather prudent to wait until we see at least a gradual increase in travel numbers.
Digital growth continues beyond the pandemic
Macy’s reported a 53% increase in digital sales in the second quarter compared to the prior year period. And e-commerce accounted for 54% of total sales. This digital gain is positive. But we have to put it into perspective. This came at a time when many communities continued to struggle with the coronavirus and shoppers were favoring e-commerce to avoid contact with others.
Going forward, it will be important to see if digital gains can keep the momentum going. In a quarter or two, we should have some idea of where the business is going. Macy’s recently updated its three-year Polaris Growth Strategy, which was originally released just before the coronavirus pandemic. The company plans to accelerate the development of its digital business. It also aims to increase the profitability of the company by finding ways to increase its margins and optimize its marketing expenses, for example.
Along with that is the strengthening of the omnichannel experience, essentially developing a seamless physical store digital business. Macy’s has created a execution system as part of this effort. Such a move should help customers get their orders efficiently and ultimately reduce Macy’s costs.
Progress on cost savings
Speaking of costs, in February, Macy’s set a target of $ 1.5 billion in savings by 2022. The company recently revised that figure to $ 2.1 billion. Macy’s made the trip because of the current, more difficult environment. Macy’s has the financial resources as it launches its turnaround plan: the company ended the second quarter with $ 1.4 billion in cash and access to $ 3 billion under a credit facility.
But given the trend in sales and profits, the need for savings is clear. Comparable store sales fell more than 34% in the second quarter year over year. And the retailer reported a loss per share of 81 cents compared to earnings per share of 28 cents in the prior year period. But the declines aren’t just the result of COVID-19. Net profit in 2019 fell to $ 564 million, from more than $ 1 billion the year before.
Now Macy’s has said it will control spending so the savings can partially offset the costs to accelerate digital business and fund strategies to drive sales.
Investors should keep an eye out for Macy’s efforts here, including things like inventory control. In the second quarter, Macy’s reported good news: inventory was down 29% from the previous year period. This allowed the chain to start the third quarter with a good sales / inventory ratio.
You don’t have to wait until 2022 to buy Macy’s stock. But a quarter or two of the progress in cost savings, along with a move in the right direction in digital, and some recovery in tourism may be signs to start betting on this retailer’s takeover.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.