After Earnings, Is Macy’s Stock a Buy, a Sell, or Fairly Valued?

Macy’s M released its first-quarter earnings report on May 28. Here’s Morningstar’s take on Macy’s’s earnings and stock.

Key Morningstar Metrics for Macy’s

• Fair Value Estimate: $23.00
• Morningstar Rating: ★★★★★
• Economic Moat: None
• Morningstar Uncertainty Rating: High

What We Thought of Macy’s Q1 Earnings

Macy’s first-quarter comparable sales on an owned basis fell 2%, as weakness at legacy stores offset a 1.3% decline at upgraded Macy’s stores and growth at Bloomingdale’s (3%) and Bluemercury (1.5%). Gross margin was flat at 39.2%, and adjusted EPS was $0.16, down from $0.27 a year ago.

Why it matters: There are signs that Macy’s “Bold New Chapter” strategy to increase its luxury exposure, operate more efficiently, and strengthen its namesake stores through merchandising, service, and store changes is working, but consistency in sales growth and margins remains elusive.

• Macy’s outperformed our forecast for a 5% same-store sales decline and $0.15 in earnings per share in the quarter. However, the firm lowered its full-year guidance for adjusted EBITDA margin to 7.4%-7.9% from 8.4%-8.6% and for adjusted EPS to $1.60-$2.00 from $2.05-$2.25.
• The reduced outlook is attributable to tariffs, costly investments in stores, and markdowns across retail. We think store upgrades are necessary and worthwhile. As for tariffs, we think Macy’s lacks the pricing or negotiating power to offset them completely but can mitigate them.

The bottom line: We expect to lower our full-year estimates for 8.3% EBITDA margin and $2.16 in EPS in response to tariffs and reduced guidance. Although our $24 fair value estimate should decline by a mid-single-digit percentage on this change, the shares are attractive, in our view.

• We rate Macy’s as a no-moat company due to the challenges facing US department stores, but we believe operating margin will improve from below 4% of late to more than 5% by 2027 as reforms are implemented and another 100 or so underperforming namesake stores are closed.
• Macy’s outlook is based on current tariffs (10% generally). About 20% of its merchandise is imported from China, which faces tariffs around 30%. Macy’s anticipates tariffs will reduce its 2025 gross margin by 20-40 basis points, accounting for much of its EPS guidance cut.

Fair Value Estimate for Macy’s

With its 5-star rating, we believe Macy’s stock is significantly undervalued compared with our long-term fair value estimate of $23 per share. We are lowering our per-share fair value estimate to $23 from $24 after Macy’s reported its first-quarter results and reduced 2025 guidance. Macy’s (owned) first-quarter comparable sales fell 2%, and its adjusted earnings per share were $0.16 (down from $0.27). Thus, Macy’s outperformed our forecast for a 5% same-store sales decline and $0.15 in EPS. However, the firm lowered its full-year guidance ranges for full-year adjusted EBITDA to 7.4%-7.9% from 8.4%-8.6% and for adjusted EPS to $1.60-$2.00 from $2.05-$2.25. Given this change, we have lowered our 2025 adjusted EPS estimate to $1.85 from $2.16. Our fair value estimate implies a 2025 P/E of 12 times and enterprise value/EBITDA of 5 times.

The reduced 2025 outlook is attributable to tariffs, costly investments in stores, and markdowns across retail. We think store upgrades are necessary and worthwhile. As for tariffs, we think Macy’s lacks the pricing or negotiating power to offset them completely but can mitigate them.

Read more about Macy’s fair value estimate.

Economic Moat Rating

We assign a no-moat rating to Macy’s, as we do not believe the company has established a durable intangible asset or cost-based advantage over competitors.

Although it is the largest US traditional department store company by sales, many financial measures suggest that Macy’s lacks a competitive edge. Its annual revenue declined to $23 billion in 2024 from a peak of $28 billion in 2014 due to consistently weak same-store sales and the closure of hundreds of stores. In fact, Macy’s annual revenue is now lower than it was in 2007. As it has lacked sales momentum, its profitability has waned. Macy’s operating margin (excluding real estate gains and charges) came in at an average of only 5.6% in the four years before the pandemic and remains in the midsingle digits now.

Macy’s annual adjusted return on invested capital, including goodwill, has been below our 10% weighted average cost of capital estimate in eight of the past 10 years, and we forecast it will average 8% over the next decade. These subpar returns support our view that Macy’s has no competitive edge.

Read more about Macy’s economic moat.

Financial Strength

Investors have long been concerned about Macy’s balance sheet, but we believe its debt is under control. Before the pandemic, the firm had lowered its long-term debt to $3.6 billion at the end of 2019 from $7 billion in 2013. Although Macy’s borrowed to provide safety when the pandemic hit, it has since paid down significant debt and extended its maturities as its fortunes have reversed. Macy’s now has $2.8 billion in long-term debt, and we forecast its 2025 year-end debt/adjusted EBITDA at a reasonable 1.7 times. Most of its debt does not mature until after 2027. We forecast Macy’s will retire its outstanding bonds as they mature, bringing its total debt to below $1.3 billion by 2031. We think this debt reduction will happen even as the firm continues to return capital to shareholders and make internal investments.

Although Macy’s has struggled, it has continued to generate positive cash flow. We forecast an annual average of about $835 million in free cash flow to the firm over the next 10 years. Some of this cash will be reinvested in smaller-format stores, supply chain, and other investments, but we also expect consistent dividend increases and share repurchases. We forecast a dividend payout ratio of about 45% over the next decade and $2.4 billion in share buybacks.

Read more about Macy’s financial strength.

Risk and Uncertainty

Our Uncertainty Rating for Macy’s is High. The firm has been struggling for many years due to pressures on traditional US department stores. For example, its annual free cash flow to equity has declined from nearly $2 billion in 2014 to an average of less than $1 billion over the past five years. Further, the company has reported negative same-store sales in seven of the past 10 years. Meanwhile, competition from traditional retailers (Kohl’s, Walmart), e-commerce (Amazon), fast fashion (Shein), and discounters (Ross, TJ Maxx) remains fierce. While Macy’s is investing in its Bold New Chapter plan to stay relevant, previous strategic plans have failed to bring in new customers or encourage existing customers to spend more.

Like other apparel and home goods retailers, Macy’s is affected by economic conditions and the business cycle. Recently, inflation and tariffs have negatively affected consumer spending on apparel and other products by low- and middle-income shoppers.

Read more about Macy’s risk and uncertainty.

M Bulls Say

• Macy’s “First 50” stores have outperformed the rest of its fleet. The implementation of the “First 50” upgrades could improve the performance of its remaining stores as well.
• Macy’s owns significant real estate that can be sold to provide liquidity, pay down debt, and finance new investments. Its real estate has also attracted activist investors and potential buyers in the recent past.
• With $7 billion in annual digital sales, Macy’s is one of the largest e-commerce companies in the US. It is building a media network to monetize its online traffic

M Bears Say

• Macy’s has been closing stores and implementing turnaround plans for years, but none of its strategies has permanently improved the underlying health of the business.
• An investment group offered to buy Macy’s in 2024, but no deal materialized. Apparent hostility toward potential buyers by Macy’s management could be detrimental to shareholders.
• Macy’s sales and profit margins have trended down for most of the past decade. We do not expect the firm’s sales or profitability to approach historical highs.

This article was compiled by Jacqueline Walker.