Macy’s CEO Jeff Gennette believes this is the winning formula for the beleaguered department store: a healthy brick and mortar business, robust e-commerce and a great mobile experience.
For two consecutive quarters that formula has produced stunning results. Macy’s (NYSE:M) blew past analysts’ sales expectations, raised its full-year forecast for same-store sales and won the confidence of the market. The stock is up more than 50% this year, the second-best performance after Amazon (NASDAQ:AMZN).
But it’s tough to call the two-quarter win a trend, given the retailer’s disastrous performance during the past three years. Macy’s fiscal second-quarter earnings report on Wednesday, August 15 will give us more evidence to see if this turnaround is for real.
The retailer is forecast to report second-quarter revenue of $5.55 billion, down just slightly from the year-ago period, and earnings per share of $0.50, up from $0.48.
So far, the linchpin of Macy’s turnaround strategy has been to improve its digital presence, close its underperforming stores and sell some of its real estate. The company is also investing heavily in its Bluemercury chain of specialty beauty stores and discount outlet Macy's (NYSE:M) Backstage.
These changes have been successful in bringing in more customers, both at stores and online. In the fiscal first quarter, the retailer reported earnings per diluted share of $0.45, an improvement from $0.26 in the same period a year ago. Comparable-store sales also rose by 3.9% for owned stores and 4.2% on an owned-plus-licensed basis.
Still A Lot of Work To Do
It’s digital that is winning over customers and Wall Street. Macy's is one of the two department store chains that let customers check prices on its app, track order history, do visual searches for products and chat with customer representatives.
The strength of its e-commerce activity shows that the retailer is well-positioned to defend its turf against much bigger rivals Amazon (NASDAQ:AMZN), Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Macy’s digital sales have been growing at a double-digit pace for the past few quarters.
But we feel that Macy's still has a lot to do at a time when the traditional departmental stores are being attacked from all fronts. Besides the existential threat that Amazon poses to the brick-and-mortar model, some off-price giants such as TJX (NYSE:TJX) and Wayfair (NYSE:W) are putting up strong competition in home renovation categories.
Trading close to the $40 a share, we see Macy’s stock is already reflecting all the positive news that came with the first round of fixes that were relatively easy to make. Entering in the game when Macy’s stock is trading close to the 52-week high is very risky.
Share will be a long-term buy once the company shows consistent improvements in its same-store sales and once its bottom line is free from the boost it’s receiving from real-estate sales. Until then, it’s better for investors to wait on the sidelines. At these levels, the stock is highly vulnerable to any negative surprise.