Department Store Woes Will Intensify Amid Digital Shift

Key Takeaways

• Ongoing consumer shifts to e-commerce and experiential spending threaten Macy's sales growth, market share, and ability to compete in core categories.
  
• Heavy fixed costs and an aging customer base exacerbate margin pressures and hinder adaptation to changing retail trends.
  
• Strategic omnichannel investments, disciplined inventory management, and financial flexibility position Macy's for market share gains, margin improvement, and long-term diversified growth.

Catalysts

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

• The continued acceleration of consumer spending away from traditional department stores toward e-commerce and digital-native competitors is expected to reduce Macy's store traffic, shrink market share, and put significant long-term pressure on overall revenue, even as the company attempts to modernize its omnichannel offerings.
  
• An ongoing consumer shift toward experiential spending such as travel, dining, and entertainment-rather than department store categories like apparel and home goods-suggests protracted stagnation or declines in Macy's core sales verticals, likely resulting in structurally muted revenue growth over time.
  
• Macy's remains heavily exposed to operating leverage risks due to its oversized brick-and-mortar footprint and high fixed costs. As foot traffic continues to migrate online and sales remain negative or only modestly improved in flagship locations, this inflexibility is poised to drive further net margin contraction.
  
• The retailer's ability to differentiate its brand in an increasingly fragmented and price-competitive retail market is faltering, with persistent promotional intensity and emerging pressures from discount and fast-fashion chains eroding pricing power and compressing both gross and operating margins.
  
• Structural demographic headwinds-including the aging of Macy's traditional customer base and sluggish growth among younger cohorts less attached to department stores-will undermine long-term demand for the company's legacy model, putting at risk both top-line performance and sustainable earnings growth for years to come.

Macy's Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Macy's compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Macy's's revenue will decrease by 8.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.5% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach $743.0 million (and earnings per share of $2.78) by about May 2028, up from $582.0 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 bearish analyst cohort, the company would need to trade at a PE ratio of 3.2x on those 2028 earnings, down from 5.7x today. This future PE is lower than the current PE for the US Multiline Retail industry at 15.7x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.6%, as per the Simply Wall St company report.

Macy's Future Earnings Per Share Growth

Risks

• Macy's strategic investments in its omnichannel experience, reimagined 125 stores, and luxury concepts (Bloomingdale's and Bluemercury) have resulted in outperformance relative to the rest of the fleet and may drive future comparable sales gains and higher net sales, especially as new brands and experiential formats are rolled out.
  
• The company's disciplined inventory management and supply chain modernization, supported by generative AI and data-driven approaches, have led to improved in-stock positions and reduced clearance activity, which could drive sustained improvements in gross margin and earnings.
  
• Macy's is taking advantage of competitive disruption, such as turbulence at Saks and Nordstrom's privatization, positioning itself to capture market share with a strong vendor network and a balance sheet that enables opportunistic brand and assortment expansion, supporting long-term revenue growth.
  
• Ongoing monetization of real estate and prudent cost controls-including savings from store closures and efficiency gains in SG&A-provide financial flexibility, enabling continued returns to shareholders through dividends and share repurchases, which could support earnings per share and share price upside.
  
• Expansion of private labels, strong loyalty program initiatives, and continued growth in media network and credit card revenues support diversification and margin enhancement, offering resilience against sector headwinds and potential for higher operating income over the long term.

Valuation

• The assumed bearish price target for Macy's is $6.0, which represents the lowest price target estimate amongst analysts. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $17.4 billion, earnings will come to $743.0 million, and it would be trading on a PE ratio of 3.2x, assuming you use a discount rate of 11.6%.
  
• Given the current share price of $12.0, the bearish analyst price target of $6.0 is 100.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.