Macy’s Has Made Progress Under Polaris but Still Lacks an Edge in Tough Environment

We believe no-moat Macy’s M is struggling to stay relevant as consumers have many choices. While revenue has recovered from the virus-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 the virus 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 no revenue growth over this period.

We think Macy’s response to market changes is insufficient. The firm is trying to leverage its strengths with its Polaris plan, which includes store remodeling and closures, improved e-commerce, and expansion of its Backstage concept. While the initiatives may be sound, we do not expect them to bring in large numbers of new shoppers. As evidence, Macy’s same-store sales have been weak over the past few years (excluding 2021) even as its e-commerce has grown. We think Macy’s has been too slow to respond to competitive threats and lacks the efficiency of fast fashion, the customer service of luxury retailers, or the low prices of discounters. While Backstage (nine freestanding stores and about 300 locations within Macy’s stores) provides a presence in the off-price space, we view it as mainly defensive as narrow-moat discount apparel retailers like TJX, Ross Stores, and Burlington have already built bases of freestanding stores. We do not think Macy’s can regain sales lost to these and other retail outlets.