Macy’s stock (NYSE: M), a department store chain, has rallied almost 4x from around $5 on March 23, 2020 (when broader markets made a bottom due to the spread of Covid-19) to $19 currently. After a share price collapse in March 2020, Macy’s stock remained deeply depressed through much of last year. The stock started growing only in November thanks to its better-than-expected third and fourth-quarter earnings and growing optimism around vaccine trials. In fact, the retailer’s stock is now 12% higher than its pre-pandemic high of roughly $17 (Feb 2020). Now, are further gains likely in the cards for Macy’s? We think that the company remains overvalued at a price-to-sales ratio of 0.34x, and could likely see a significant downward correction based on its historical multiples. Our dashboard, ‘What Factors Drove 27% Decline In Macy’s Stock Between FY 2019 End And Now? provides the key numbers behind our thinking, and we explain more below.
Macy’s was in the midst of a turnaround plan as part of its bid to get back to same-store sales growth, even before the pandemic. In addition, the high costs of maintaining store networks put Macy’s at a competitive disadvantage to e-commerce specialists with capital-light models. That said, the problems that plagued the company before the pandemic will still continue to be in place once this passes. In addition, a large debt burden of almost $4.9 billion in combined short and long-term debt, declining sales trends in the last two years, and an uncertain future of most of its stores (despite store closures) located in malls make it a risky bet. It should be noted that the $4.9 billion debt is a heavy burden for a company reporting a $3.9 billion net loss in fiscal 2021 (year ended Feb 1, 2021)
Macy’s stock declined 43% from around $26 in FY 2019 to roughly $15 in FY 2021 (year-ended Feb 1, 2021). Over this period, the company’s revenues saw a slump of close to 31%, largely due to the pandemic. Macy’s stock price during the FY 2019-2021 period declined largely due to the market assigning a lower P/S multiple from around 0.31x in FY 2019 to 0.26x in FY 2021. While the company’s P/S is now 0.34x, it has a downside risk when compared to the P/S multiple of the last few years.
So what’s the likely trigger and timing for the further downside?
During the coronavirus pandemic, Macy’s became vulnerable due to its high operating costs, mall-based locations, and nonessential product assortment. The retailer’s revenue grew nearly 70% sequentially from about $4 billion in Q3 2021 to $6.8 billion in Q4 2021. But the revenues were still down 19% from year-ago quarter levels. It should be noted that digital sales growth was strong, up 21% in Q4, and accounted for 44% of net sales. The department store giant is finding ways to use its vast store network to fulfill online orders. However, the pace of Macy’s online sales growth won’t likely last once the Covid threat abates.
Looking ahead, Macy’s expects full-year revenue in the range of $19.75 billion to $20.75 billion, which compares to a $20.1 billion consensus estimate. In addition, the department store expects EPS to fall in a range of $0.40 to $0.90, compared to the $0.75 consensus. As it is, Macy’s annual guidance anticipates continued pandemic-related challenges in the spring season with momentum building in the back half of 2021.
Given the uncertainty of its recovery and its turnaround time frame, Macy’s stock looks risky. But 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Lowe’s vs. Regeneron Pharmaceuticals shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.
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