Urbanization And Digitization Will Unlock New Retail Horizons

Key Takeaways

• Macy's increased focus on private label expansion, omni-channel investments, and experiential urban retail strongly positions it for above-market sales and margin growth.
  
• Sustainability and ethical sourcing initiatives are enhancing customer loyalty and operational efficiency, boosting market share and long-term profitability.
  
• Declining store traffic, ongoing cost pressures, and unmet brand repositioning efforts threaten Macy's long-term revenue growth, margins, and ability to retain its customer base.

Catalysts

An omni-channel retail organization, operates stores, websites, and mobile applications in the United States.

• Analyst consensus sees store closures and reinvestment as positive, but this likely understates the true impact: sustained comp sales growth at Go-Forward stores, Reimagine 125, Bloomingdale's, and Bluemercury indicates a persistent increase in productivity and brand relevance-positioning Macy's for sustained, above-market revenue and earnings growth, not just margin lift, as high-income urban shopping and experiential demand accelerates.
  
• Analyst consensus recognizes the upside of merchandising and private label expansion, but the meaningful underpenetration of high-margin private brands-currently in low teens versus a historical 20 percent-along with Macy's strong vendor relationships and exclusive collaborations, create outsized gross margin and net margin expansion opportunities far greater than typical retail peers.
  
• Macy's landmark omni-channel investments and technology-driven customer experience-evidenced by record Net Promoter Scores and rising digital/customer engagement-position the company to capture disproportionate share as shopping continues shifting to hybrid in-store/online models, supporting long-term comp sales growth and higher lifetime customer value.
  
• The company's prime flagship real estate footprint in affluent, urban markets is uniquely positioned to benefit from rising urbanization and population growth, enabling Macy's to capture outsize share of luxury, premium, and experience-driven consumers, which will drive sustainable revenue and profit growth as retail consolidates and weaker competitors exit.
  
• Macy's growing focus on sustainability, ethical sourcing, and supply chain transparency is already drawing improved vendor partnerships and customer loyalty, setting the stage for increased market share (especially with younger $100K-plus shoppers) while simultaneously lowering risk and cost, elevating both topline and net margin over the medium to long term.

Macy's Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Macy's compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Macy's's revenue will decrease by 3.8% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.2% today to 3.0% in 3 years time.
• The bullish analysts expect earnings to reach $616.1 million (and earnings per share of $2.33) by about September 2028, up from $494.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, up from 9.3x today. This future PE is lower than the current PE for the US Multiline Retail industry at 21.6x.
• Analysts expect the number of shares outstanding to decline by 3.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.7%, as per the Simply Wall St company report.

Macy's Future Earnings Per Share Growth

Risks

• Macy's continues to face the long-term secular trend of consumer migration to e-commerce and digital-first shopping, which means traffic and revenues from traditional department stores are likely to decline over time, potentially weighing on future revenue growth.
  
• The core shopper demographic for traditional department stores is shrinking as younger consumers increasingly prefer experiential spending and off-mall retail, suggesting Macy's could struggle to maintain its customer base and see a long-term drag on top-line revenue.
  
• Macy's is making only gradual progress in closing or optimizing its legacy store footprint, which leaves the company with a high level of fixed costs, putting persistent downward pressure on net margins as unprofitable locations linger.
  
• The promotional environment remains intense, especially as Macy's matches discounting from e-commerce and off-price competitors; this dynamic risks further compressing gross margins and eroding earnings quality over the long term.
  
• Macy's efforts to reposition its brand and differentiate in an increasingly crowded omnichannel retail landscape have not yet proven sufficient to stem share losses, meaning future revenue growth could be limited and the company's earnings at risk of stagnation or decline.

Valuation

• The assumed bullish price target for Macy's is $22.92, which represents two standard deviations above the consensus price target of $15.46. This valuation is based on what can be assumed as the expectations of Macy's's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $23.0, and the most bearish reporting a price target of just $6.5.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $20.2 billion, earnings will come to $616.1 million, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 11.7%.
• Given the current share price of $17.21, the bullish analyst price target of $22.92 is 24.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.