Macy’s Stock Forecast: Macy’s Putting Up Fight Against Online Retail Behemoths

 

This article was written by Julia Masch, a Financial Analyst at I Know First.

 

“Macy’s, Inc.’s results for the first quarter of 2018 reflect continuing momentum in the business. We exceeded our expectations and saw strong performance across all three brands—Macy’s, Bloomingdale’s, and Bluemercury—as well as across all geographic regions and families of business.”

-Jeff Gennette, chairman and CEO of Macy’s, Inc

(Source: Wikimedia Commons)

Summary:

  • Stock price surge on strong Q1 report
  • New initiatives to compete with Amazon
  • Implementation of Virtual and Augmented Reality
  • I Know First Current Bullish Forecast for Macy’s Stock

Macy’s, Inc., (NYSE: M) operates about 700 department stores under the Macy’s and Bloomingdale’s as well as websites and mobile applications which sell a variety of merchandise such as men’s and women’s apparel and accessories, cosmetics, home goods, etc.. 

Despite the fact that most brick and mortar department stores are struggling and closing stores, Macy’s has seen large growth since the beginning of the fiscal year which can be seen in the graph below. Macy’s stock price has risen 63.11% since the fiscal year began on October 1 up until May 21. 

Additionally, Macy’s has posted strong reports for Q1 2018 with increases in comparable sales for the second quarter in a row which can be seen below. As other retailers such as Sears, JC Penney, and more close stores, Macy’s will face less brick and mortar competition and can take a larger market share, but still must compete with online retailers like Amazon.

Strong Sales for Second Quarter in a Row Boosts Confidence

On May 16, Macy’s released their first quarter earnings report and showed they had exceeded expectations in almost all categories which prompted share prices to increase by 10% by midday. After closing at $29.93 on May 15, Macy’s stock has bounced to $34.61 as of May 21, a 15.63% increase since the earnings report.

(Source: Yahoo Finance)

Q1 earnings per diluted share and earnings per diluted share excluding asset sales beat predictions and showed large increases from the year before: Q1 earnings per diluted share increased to $.48 from $.26 for Q1 last year and earnings per share excluding asset sales increased from $.12 a year ago to $.42 for Q1 2018. These increases in earnings are a direct result of gross margin increasing to 39% (combined with decreasing administrative expenses). Additionally, net sales were $5.54 billion, an increase of 3.6%, that exceeded expectations of $5.39 billion. Not only did net sales increase, but comparable sales on an owned basis did too, leading to a 4.2% increase in comparable sales on an owned plus licensed basis. All changes in comparable sales can be seen on the chart below.

(Source: Macy’s Investors Relations)

Macy’s attributed 2.5% of the change in comparable sales to the Spring 2018 “Friends and Family” promotional event. Thus, the adjusted increase in comparable sales was 1.7%. These positive numbers caused an immediate surge in Macy’s stock price once the Q1 reports were released.

Macy’s Initiatives to Compete with Amazon

Macy’s used to be a location consumers went when they needed products from many different departments such as clothing, home goods, and cosmetics, but now people are able to shop for all of these from the comfort of their homes; therefore, an integral part of staying profitable is staying competitive with online retail behemoths like Amazon. In order to stay competitive, Macy’s is expanding the selection of merchandise available online, giving customers the option and convenience of shopping in their homes. Macy’s is also giving consumers the option to return products bought online in store, giving consumers more flexibility. Products purchased online can be returned either by mail or in store adding yet another convenient factor to the online shopping process.

Macy’s is also improving the in-person shopping experience to draw consumers away from online shopping. Macy’s has been testing mobile checkout in stores so customers are not forced to wait in long lines, one of the many inconveniences of shopping in person. Macy’s has plans to introduce this new checkout process to about 500 stores across the country. Additionally, Macy’s is attempting to turn shopping into an experience that draws consumers. Recently, Macy’s acquired Story, a New York based company that focuses on creating unique displays and experiences within stores that consumers can interact with and enjoy. These displays will constantly be on rotation, ideally drawing back consumers to see what’s coming next.

Implementation of Virtual and Augmented Reality

Macy’s is also introducing augmented and virtual reality to grow its high margin furniture business. In 3 pilot program stores, customers can use virtual reality to combine different sets and look at objects that are not in stock at particular stores. These virtual realities transport customers to virtual showrooms displaying more furniture than could fit in an actual store which allows stores to decrease their own inventories. Following the success of the pilot program, this technology will be spread to 60 more stores over the course of the year.

(Source: Wikipedia)

Macy’s has also added a feature on their app that allows consumers to see an augmented reality within their own home. By pointing their camera at a room, consumers can see how Macy’s furniture would look and fit from the comfort of their own homes as can be seen in the picture above. This assuages a common consumer fear that furniture will not match what they have at home or will not fit in the space they have available which should increase sales. Both virtual and augmented reality allow Macy’s to improve profitability on the home goods department.

Creating Customer Loyalty

In a time when most common brands are easily purchasable from a myriad of vendors online, Macy’s has begun to put emphasis on their own private labels such as BlueMercury, a cosmetic label, and Backstage, a popular discount label. Macy’s plans on increasing private label inventory to 40% of total merchandise. Recently, Macy’s has opened 20 Backstage locations within existing stores. Macy’s containing these mini-stores have about 7% higher sales in comparison to stores without them. There are plans to open 100 more Backstage locations in existing Macy’s this fiscal year. This differentiation of product and attraction of consumers to a particular brand is extremely important as it boosts brand loyalty to Macy’s as a whole while also increasing overall foot traffic.

(Source: Flickr)

Loyalty is extremely important to Macy’s as a brand, according to the Wall Street Journal46% of annual sales are accounted for by only 9% of customers. Recently, Macy’s has rolled out a new loyalty program to maintain these consumers who are extremely important to the company’s success. So far this new loyalty is having its intended effect and, as mentioned earlier, the Spring 2018 “Friends and Family sale” impacted comparable sales by 2.5%. Increasing loyalty to Macy’s prevents customers from shopping elsewhere for the convenience, increases foot traffic in stores, and increases sales.

Technical Analysis

From the start of the fiscal year to May 21, the 50 day simple moving average (SMA) has fluctuated between being above and below the stock price of Macy’s. After converging on May 15, the stock price has greatly increased in comparison to the SMA indicating a bullish forecast for Macy’s and a change from the previous bearish trend. Looking at the technical analysis of the stock, it is a good time to hold or buy the stock as the price is much greater than the 50 day moving average.

Analyst Recommendations

(Source: Yahoo Finance)

Analyst recommendations from Yahoo Finance indicate that the current consensus is a “Hold” in Macy’s stock with some opting to buy and a small number choosing to sell. I stand with the analysts recommending buying or holding the stock.

I Know First Current Forecast

In line with my recommendation to buy Macy’s, the current I Know First Forecast gives Macy’s a bullish signal of 64.51 over a 3 month period with a predictability of .22. In the long run, over a year, the algorithm gives an extremely high signal of 311.45 with an also high predictability of .27. These are strong signals that suggests future success for Macy’s stock according to the predictions of the I Know First algorithm.

Conclusion

Overall, after a tough year for department stores, Macy’s is on the upswing. Its strong Q1 reports suggest future success for the company while their new strategies to stay competitive with Amazon as well as working on improving consumer loyalty will keep customers coming to stores in a time that malls have seen decreasing foot traffic. The only way Macy’s will succeed is to continue focusing on both physical location shopping as well as the online and mobile shopping experience. Jeff Gennette understands the importance of this double pronged approach and will continue to expand this approach to the whole chain. As the virtual reality pilot programs and Backstage mini-stores roll out to more Macy’s stores across the country, same store profits should increase. It is clear that Macy’s is going to put up a fight against the online retail giants like Amazon with their new initiatives and strategies. Moreover, the technical analysis suggests a good peak and that it is a good time to buy Macy’s stock. My bullish stance on Macy’s also resonates with the current I Know First Algorithmic Forecast.

 

Past I Know First Success with M:

I Know First has made accurate predictions about Macy’s in the past. In a bullish prediction posted on November 27th, 2017, the I Know first gave Macy’s a signal of 21.52 with a predictability of 0.1 for M. Over the predicted time period, Macy’s stock increased by 22.45%, in accordance with the prediction. This Quick Win for Macy’s was the result of a strong start to the holiday shopping season beginning with Black Friday sales and high foot traffic. The current signal for Macy’s is stronger than it was for this previous accurate prediction.

This bullish forecast was sent to the current I Know First subscribers on November 27th, 2017.

I Know First Algorithm Heatmap Explanation:

The sign of the signal tells in which direction the asset price is expected to go (positive = to go up = Long, negative = to drop = Short position), the signal strength is related to the magnitude of the expected return and is used for ranking purposes of the investment opportunities.

Predictability is the actual fitness function being optimized every day and can be simplified explained as the correlation-based quality measure of the signal. This is a unique indicator of the I Know First algorithm. This allows users to separate and focus on the most predictable assets according to the algorithm. Ranging between -1 and 1, one should focus on predictability levels significantly above 0 in order to feel confident about/trust the signal.