Macy’s Is Making Some Prudent Investments but Still Lacks a Competitive Edge

We believe no-moat Macy’s is struggling to stay relevant as consumers have many choices. While revenue has recovered from the pandemic-related 29% drop in 2020, we think the company's fleet of more than 500 full-line stores limits its options. Macy’s operates stores in most top-tier U.S. malls, but it also operates scores of stores in weaker malls, some of which are probably not viable in the long run. The company does not need its vast selling space, as department stores have been losing market share to e-commerce and other retailers (outlets, branded stores, specialty stores, discounters) for years, and we think COVID-19 caused this trend to accelerate. Further, although it spiked to 9% in 2021, we forecast Macy’s operating margin (excluding real estate gains and charges) will average just above 6% over the next decade. Due to store closures and a lack of consistent organic growth, we forecast revenue will stay below historical highs for the foreseeable future.