Any Hope Left for Macy’s Stock?
Macy’s, Inc. (NYSE:M) reported lower revenue in the last quarter, even as its online sales rose. Still, Macy’s stock dropped almost 20% on the news. No amount of optimism, whether it comes in the form of online sales or other fancy-named strategies, can mask the fact that retailers are suffering—Macy’s included. Consumer spending has not recovered and the U.S. economy is merely stumbling along, rather than thriving.
Has Macy’s stock become a major short opportunity? It has not quite come to that level yet. Macy’s could still turn around, but the route to recovery is more online than in-store.
The Macy’s parade will have fewer followers this year, but retailers are suffering in general. In that sense, Macy’s stock could take more beatings over the course of 2016. Yet despite the overall risk, it’s too early to dismiss Macy’s. The famous retail chain has more antibodies to cope with the symptoms of a slowing economy as a whole. (Whether it can manage a full on economic collapse is another story.)
One of the symptoms of an economic slowdown was the Dow Jones Industrial Average falling to its lowest level since February 11. The other major symptom, especially as far as Macy’s is concerned, is that the overall rise in consumer spending that analysts coveted that would spur the U.S. economy didn’t happen.
The fact that consumers did not feel the urge to spend, even as fuel prices and the labor market (allegedly) improved makes the consumer spending failure all the more pessimistic. Consumer spending has dropped for the third consecutive quarter. Meanwhile, the U.S. economy grew just 0.5% in the first quarter of 2016—that’s worse than some European Union countries… (Source: “Stocks Drop on Consumer-Spending Worries,” The Wall Street Journal, May 11, 2016.)
Unfortunately, Macy’s lackluster results have raised fears about the whole consumer sector. Macy’s stock dropped 15% on its latest earnings report, falling to $31.38 per share, nothing less than its deepest single-day drop since 2008. (Source: Ibid.) Macy’s has lowered its expectations and CEO Terry Lundgren spoke in rare pessimistic terms about consumer spending picking up for the rest of the year: “We are not counting on the consumer to spend more,” he noted. (Source: Ibid.)
Note that I have described Macy’s sales as lackluster, rather than full on dreadful, because there were some retail areas suggesting there’s a glimmer of hope. Macy’s sales dropped overall, but its omnichannel online strategy showed strength. In January, Macy’s closed 40 outlets—those found to be most responsible for the drop in sales in the last quarter—and eliminated more than 2,000 jobs. Macy’s then redirected the $400 million in savings toward its omnichannel effort, which is the one bright spot in the company’s outlook.
For the benefit of dilettante consumers, omnichannel marketing is a new way of using online media from smartphones to tablets and consumers to translate the in-store consumer experience online. For Macy’s, this is essential for survival as it faces increased competition from online only retailers such as Amazon.com, Inc. (NASDAQ:AMZN).
Karen Hoguet, Macy’s CFO, said that her company has seen double the amount of online sales from one year to the next. The hopeful sign is that Macy’s has recognized the problem and understands the solution. (Source: “Cowen: It Looks Even More Like Amazon Will Become America’s Top Clothing Retailer in 2017,” Bloomberg, May 11, 2016.)
The company has already shifted resources to enhancing the omnichannel experience. Macy’s also offers same-day delivery and it can use its stores to enhance the omnichannel strategy, allowing consumers to ponder purchases online but also be able to see and feel products ahead of ordering in the physical stores. This is something Amazon cannot offer; its “omni” experience is rather more limited.
Finally, there are two other considerations about Macy’s stock worth noting. The first is that except for the last few days, Macy’s stock actually grew almost 10% year-to-date—if you stop the clock on May 9. The current drop is a reaction to the less-than-expected sales. The second aspect is that Macy’s has valuable fixed assets, which could draw as much as $21.0 billion. (Source: “Greenlight Capital’s David Einhorn Takes Stake in Macy’s,” WWD, January 19, 2016.)
If there is a bottom line on Macy’s stock it is that the company is still alive and knows where it must focus its energy: on the online experience. It also knows the retailer it must beat, or at least match: not Saks or J C Penney, but Amazon.
Over the next quarters, as Macy’s continues to divert its investments from poor-performing stores to its omnichannel shopping machine, the picture will become clearer.
For now, sitting on the fence about Macy’s might be the wisest strategy.