Is Macy’s P/E Of 6 A Buying Opportunity? (NYSE:M)

Macy’s (NYSE:M) is currently looking strong, with double-digit revenue growth and revenue exceeding the pre-pandemic levels in 2019. The company has also successfully completed a two-year digital transformation program by adopting its Polaris strategy. So far, Macy’s emerges from the pandemic as a better-run business. Over the past year, the company has reinstated its dividend and plans to execute a $2 billion buyback program. The stock traded at just 5.7x forward earnings compared to 12 to 15 times net profit before the COVID-19 pandemic. Is it time to buy?

Financial overview

Macy’s reported its fourth-quarter results for fiscal 2021 results on the 22nd of February 2021. The management delivered some jaw-dropping results, with revenues increasing 27.8% year over year (YoY) to $8.66 billion, beating analyst expectations of $8.45 billion. At the same time, same-store sales increased 28.3% year over year or 6.6% higher than those of 2019.

Digital sales have been playing a bigger and bigger role for the company in the past two years and ever since implementing the Polaris strategy. Sales have increased by 12% year over year and currently stand 36% higher compared to the numbers of 2019.

One of the critical ratios investors were watching was the gross margin which increased to 36.5%, up from 33.7% the same time before. This was all good news given all the words about inflationary pressure and labor shortage. Most importantly, the company posted earnings-per-share of $2.45 excluding non-recurring items, which came to $0.45 per share ahead of consensus among analysts expecting around $1.99.

The 7.2 million new customers and the $2.3 billion in free cash flow were among the other significant numbers. After completing the $500 million stock repurchase, the board authorized a $2 billion stock buyback program and increased the quarterly dividend by 5%. Furthermore, the company has paid down debt taking the adjusted debt-to-adjusted EBITDAR leverage ratio below the 2.5X objective.

The CEO of Macy’s, Jeff Genette, labelled 2021 as a successful year as the company made what some people thought impossible at the beginning of 2021 and surpassed expectations on both the top and bottom lines in every quarter of 2021 on the back of rising inflation, supply chain issues and labor shortages.

What is the future like for Macy’s?

Management of Macy’s estimates solid year-over-year growth in the first quarter. Although the expected growth may look impressive at first glance, investors should know that the Q1 of 2021 was significantly affected by the pandemic. Therefore, it does not provide the best like for like comparison.

Beyond that, Q2 and Q3 will be stern quarters to beat as the market starts accelerating its recovery. Also, stimulus checks boosted the figures, which had a significant contribution in those quarters.

Overall, 2022 will be a transitional year for Macy’s as the world moves beyond the recovery and begins to normalize. Further, the company’s challenges, such as supply chain disruptions, labor shortage and inflationary pressure, are expected to continue troubling the business, with the last two potentially putting more pressure in 2022.

For the whole year, management predicts net sales to be flat to up 1% in 2022. Adjusted diluted earnings per share are expected to be between $4.13 and $4.52. The range is better than the $4.04 a share estimated by the analysts but way below 2021’s $5.31 a share.

Is the stock worth it?

Macy’s stock is 4% down year-to-date and 30% below its peak of $37 on the 18th of November last year.

However, the peak matches with the Q3 release when the company posted a massive 36% revenue growth in what was not a particularly strong quarter in 2020. The numbers beat the market estimates for revenue and earnings and have made management confident in boosting its outlook for the rest of the year. The stock soared nearly 22% in the middle of the day. The effect of that release spread across the whole retail sector, with many retailers such as Nordstrom (JWN) and Kohl’s (KSS) registered some gains the same day.

The rally was short-lived, as this was an overreaction. The market digested the information and weight the potential risks for the future. Eventually, Macy’s stock settled in the $24 to $28 a share range.

The stock currently trades at $26 a share, precisely in the middle of this spectrum and at just six times forward earnings. The business looks strong, with a solid cash flow generation and $1.7 billion in the bank. Management feels confident in the future of retail and took the chance to hike the dividend and launch a massive $2 billion share repurchase program.

With a current market capitalization of $7.7 billion, the share purchase program represents more than 25% of the whole issuance, which will benefit the shareholders substantially. However, whether the share repurchase program will transform into a 25% gain for shareholders is still unclear.

Risks

Slowing down growth has undoubtedly affected multiple. Not to mention that inflation in the U.S has only been accelerating in the past few months, mainly driven by higher energy and commodity prices.

Although the supply chain disruptions are expected to ease with time, the labor shortage remains a challenge. The tight labor market has pushed more and more companies into increasing wages and taking a deep dive into their daily operations to make the businesses more efficient.

Conclusion

The retail sector as a whole will face tough comparables from 2021. But Macy’s remains highly cash generative with less debt than before. The management will use the money to ramp up shareholder returns. Given the attractive multiples, the business could start repurchasing shares very aggressively. I believe the stock is “Buy”, and we could see the stock ticking higher very soon thanks to the buyback program.