The strategy being employed by Macy’s (M, Financial) could lead to a further rise in the retailer’s stock price.
The retailer is investing in digital capabilities as it seeks to boost its omnichannel presence, while also offering a wider range of goods online than in-store. Investment in its loyalty program may also boost its performance, while the opening of its discount brand, Backstage, could catalyze sales growth over the medium term.
With the company’s second quarter results causing a degree of volatility, the stock could offer long-term investment potential. Comparable sales growth of 2.1-2.5% is expected to be recorded in fiscal year 2018, with earnings per share forecast to rise between 5% and 10%. In the long run, further growth looks set to be delivered.
Growth potential
In the last year, the Macy’s stock price has risen by 73%. This compares favorably to the S&P 500’s performance during the same time period, with the index being up 18%.
A potential catalyst on Macy’s future financial performance could be e-commerce growth. The company continues to focus on its omnichannel capabilities, investing heavily in its digital capabilities as well as in its in-store customer experience. This is helping to deliver high levels of growth, with its digital segment recording double-digit sales growth in the most recent quarter. Its mobile app recorded sales growth of over 50% last quarter, with increased engagement suggesting that it could offer further growth over the medium term.
The company has also decided not to limit its online sales potential to products and brands that are available in its stores. This means that it is able to offer a wider range of products online, which could equal higher sales in future. A larger selection of items is expected to come online over the next two quarters. The presence of a wider range of complementary goods could help to improve customer retention and loyalty, as well increase the average basket size.
Focused strategy
The decision by Macy’s to close underperforming stores in recent years has helped to stabilize its overall performance. Now, though, it seeking to deliver improved growth through its discount brand, Backstage, which it plans to roll-out across a number of its stores over the coming months. It opened 47 Backstage stores in the second quarter, which takes the total opened for the current fiscal year to 65. It is on target to complete 120 openings this year, which includes an expansion of the brand to the West Coast. The Backstage stores have provided a revenue lift and have also caused new customers to be attracted to the company.
A change in the company’s loyalty program could also boost its financial performance. Measures such as offering free shipping on all e-commerce purchases for loyal customers and 5% in rewards for certain levels of spending could encourage higher levels of customer engagement. Since many of the changes being made to the loyalty program have only recently been introduced, it may take time for them to impact customer behavior. Therefore, over the medium term, sales growth from existing customers could improve at a faster pace than they have done in the recent past.
Potential threats
Macy’s second quarter comparable sales growth of 0.5% was relatively disappointing. This came at a time when sales in the wider home furnishing segment increased by 4.1% between May and July. Clothing sales were up 8.9% in June after rising 7.4% in May, which shows that the company is continuing to lose market share. This trend has been ongoing for a number of years and is showing little sign of slowing down.
The second quarter’s comparable sales figure, though, was negatively impacted by a 53-week calendar in fiscal 2017. This caused some promotions to be shifted into the first quarter of the 2018 fiscal year.
The effect of this was to boost first quarter comparable sales, with the second quarter figure suffered. Adjusting for this situation means that second quarter comparable sales were up 2.9% versus the same quarter of the previous year. While this is still below the growth of the wider sector, the investment being made in the business could lead to improved sales and margin performance over the long run.
Verdict
The prospects for Macy’s stock price seem to be positive. Investment in its omnichannel capabilities could drive sales growth, while a refreshed loyalty program may lead to higher levels of repeat business and a larger basket size. The opening of additional Backstage stores may also provide a sales boost over the medium term.
Although the company looks set to continue to lose market share and its gross margin could fall in the near term, its long-term strategy appears to be sound. As a result, further outperformance of the S&P 500 could be ahead.
