The clothing and apparel market has been undergoing a constant change over the last few years as many players continue to launch their online platforms. The industry has also been affected geographically, especially where new entrants woo customers to their newly launched stores while in some places the market has been overly saturated. As such, incumbent players like Macy’s (M, Financial) have had to adjust their operations to cope with the current market changes.
However, not every player has been as successful as Macy’s in embracing this change. The company also had to hurt some people associated with it, especially employees given the layoffs it had and has to implement as it continues to close some stores for the benefit of strengthening its online platform as well as concentrating operations on stores that are meeting expectations and opening new ones.
Macy’s is slimming down for the best
Macy’s announced early this month that it will be closing 35 to 40 stores in early 2016 that have been underperforming over the last few quarters. This is a routine exercise for the company, as it has continually been pruning underperforming stores to concentrate on strongholds.
The company has been facing increased competition in some locations as customers continue to shift to newly launched retail stores. In this effect, the company will be closing the yet-to-be-disclosed underperforming outlets in a bid to concentrate investments in well performing stores as well as strengthening its online retail platform.
In addition the company will open new stores at strategic locations including the recently announced Bloomingdale’s outlets in Philadelphia. The store's outlets are set to open in November this year, thus bringing the total Bloomingdale’s outlets to 16 from the current figure of 13.
Macy’s also launched a new off-price retail brand dubbed Macy’s Backstage. The company is slated to open a total of six stores under this brand name by the end of the year. The stores will be opened in the New York metro area, Hyde Park, Long Island as well as in New Jersey, among other strategic locations.
The company is using the Backstage Stores brand to penetrate new lines of business including eateries, bars and beauty services, such as fur salons.
The 35 to 40 stores that that will be closed accounted for about 1% of its overall revenues, and this will be some money of the books. However, by doing so, it is also keen to strengthen its presence in the rapidly growing ecommerce unit. In a recent statement, Chairman and CEO Terry J. Lundgren revealed how critical the online business is to the company’s long-term plans, also pointing out how rapidly it has been growing over the last few quarters.
“Macy’s is already one of the largest and fastest-growing digital platforms in the country. Our fast-growing digital offering, including robust apps and mobile-enhanced Web sites, integrate with our stores to provide an unparalleled omnichannel shopping experience for customers wherever, whenever and however they prefer to shop. As a result, we are able to attract new customers and grow sales profitably,” said Lundgren.
Macy’s is also is planning a partnership with one of the leading electronic retailers in the United States, Best Buy (BBY, Financial), as they look to test consumer electronic departments in Macy’s stores. This aligns well with the company’s ability to adjust to a market environment where consumer shopping habits are changing all the time.
The company’s online omnichannel shopping experience for consumers is also a sign that Macy’s is doing well to ensure that it remains competitive even as competition increases across various shopping platforms.
The company has closed 52 stores over the last five years and opened 16 new ones. This is a clear signal that Macy’s is strategically slimming up and that it is not just a matter of closing stores. This perhaps explains why Macy’s has been more successful than its close peers, JCPenney (JCP, Financial) and Sears Holdings (SHLD, Financial), over the last few years.
Is now a good time to buy Macy’s?
Now, shares of Macy have plunged following the announcement of Q2 results, which apparently stunned investors. The company reported a decline in both revenues and earnings year over year, and this did not go well with investor sentiment.
The company’s profits decreased by nearly 26% to $217 million or 64 cents EPS, compared to earnings of $292 million or 80 cents EPS reported the same period a year ago. On the other hand, revenue declined to $6.1 billion from $6.26 billion reported a year ago, representing a 2.6% decrease.
This means that the company also missed analyst expectations on both metrics of 76 cents EPS and $6.22 billion, respectively. This triggered a massive fall in price from about $67 per share to the current level of about $57 per share, which represents about a 15% decline in value of the stock.
Following the fall in revenue and earnings plus the massive decline in stock price, shares of Macy’s are currently trading at 12.91 times in price-to-earnings ratio and at about 0.62 times in price-to-sales ratio for the trailing 12-month period. This compares to the industry average of 16.71 times P/E and 1.58 times P/S. Based on these comparisons, Macy’s appears to be reasonably cheap compared to its peers.
If Macy’s stock price was to rise to trade at the current industry average levels, then it would have to increase to about $73 per share to trade at the same P/E as the industry. Analysts also have an average price target of about $70 per share, which suggests that Macy’s could be an interesting stock for the next 12 months, especially given the fact that it is set to expand its Bloomingdale’s store outlets as well as launch an new brand by the end of the year.
What are the main risks?
One of the biggest risks at the moment is the fact that the company’s results missed analyst estimates and also declined significantly from last year. The company also revised downward its guidance for the full-year results and is also set to close more stores early next year. This means losing a chunk of the revenues from its income statement.
In addition, opening new stores means incurring initial cost before revenues start streaming in, and this will hurt the company’s profits.
Now, while the idea of closing underperforming stores is a good one, some investors may not view this in the same way. Sometimes it can be interpreted as a sign of weakness/slowing performance, making it less appealing to investors.
Competition is also increasing as retailers, large and small, continue to launch their own online platforms. As stated by Lundgren, ecommerce is part of the company’s long-term strategy for growth.
Conclusion
The bottom line is that Macy’s has shown resilience and determination to continue adapting to changes in consumer shopping habits, and the idea of maintaining its stores as a place where customers go to shop, relax and be entertained is bound to pay dividends in the end. It is like a one-stop shop.
The company is strategically slimming up and is not shy of looking for viable opportunities, even outside its normal business operations. This bodes well with strategic growth plans; given the recent plunge in price, now seems to be a good time to buy shares of Macy’s.
