The pandemic has hit retailers particularly hard, and this is a sector that was already in considerable distress. Macy’s seems to be doing their best to survive, but don’t get too excited.
Before we decided not to allow retail stores to remain open due to fears of the COVID-19 pandemic, the retail sector was already sick in bed, including Macy’s. Retail has always been highly competitive, but traditional American retail chains have been under attack from both behemoth Walmart, which they struggle to compete with on price, and now Amazon, who have carved out a big niche already on the backs of these retailers.
There is still a place for in person retail, and there are some real advantages that they offer. Walmart does sell a massive amount of stuff but is focused on the discount market, and while it’s a huge challenge to compete with them in this demographic, those who sell higher-quality merchandise at least can shoot for a different market, one that Walmart does not serve.
We’ve seen the emergence of not only Amazon, but of higher end online shops that have also grown and have been eating away at the market share that has been traditionally enjoyed by Macy’s and other department stores.
Something has to give here, and traditional retailers operate with a business plan that does require that they do a lot of volume, and when this volume drops off, they clearly suffer. There is still a place for this sort of commerce, as they can both offer instant gratification and more personal service, but the industry as a whole remains very bloated as their place in the new frontier requires a smaller and smaller footprint, and they have been slow to shrink their businesses enough and adapt enough in other areas as well.
While we may have picked on Macy’s a bit when we have looked to provide an example of a bad retail stock or a bad stock period, as there are worse ones out there, the fall of Macy’s has been plenty significant enough to be worthy of carrying this flag. The last 5 years have been very unkind to this stock, even though the business hasn’t been doing all that badly, and nowhere enough to cause them to fall from over $73.61 in July 2015 to $16.64 before this pandemic hit.
It hasn’t been earnings that have really driven this and Macy’s earned an average of $3.16 per share over these 5 years, which easily beat the $2.33 per share they averaged between 2005-07 where the stock doubled instead of the 63% that they lost from 2015 to this past February.
Investors often rely on price to earnings ratios, and usually get this backward, where high ratios indicate a bright future, the premium that the market has added to it, and comparing Macy’s P/E ratio of 5 at the start of the year to Amazon’s 116 makes this principle stand out very clearly indeed.
Macy’s P/E In Intensive Care is Not a Good Thing at All
We might think that Macy’s big fall is based upon their business struggles, and it’s not that they have been growing or anything, more like keeping up. Just keeping up is not the plan with stocks, but that hasn’t been the problem with their stock, it is the stone-cold future that the market has priced into this stock compared to the red-hot Amazon.
A very low P/E ratio like this is not necessarily an opportunity, and the only time it makes sense to see this as actual value is when a stock has been temporarily thrown into the hospital, like so many stocks have from this pandemic and lockdown. When your stock is instead in a long-term care facility like Macy’s has been, getting back to the nursing home, back to the intense struggle that their stock has been under before all this, is not very exciting at all, especially when you can have your money in something else, Amazon for instance which is up 30% this year alone, pandemic and all, including this extremely high P/E which continues its meteoric rise.
This was all before the lockdown, before the wheels really came off Macy’s stock, back when their stores were open. When you take a stock this sick at full speed and you slow down their business drastically, you get to see just how uglier this situation can get.
Macy’s has lost a further 64% since February, including the period of revival that we have had over the last 2 months. The stock did try to pick itself up a little a few times since, raising up an elbow, but has just fallen back on its face and remains on the ground, badly injured now.
Some stocks came back nicely since the crash, some haven’t moved very much but have shown promise like the airline stocks, and some have basically just flatlined since. Macy’s chart looks like an L right now, and L stands for loser when it comes to these patterns, unresponsive when the paddles were placed upon this stock’s chest and the juice of a huge recovery in stocks in general was applied.
It’s not that Macy’s is completely dead, as far as the company goes, but the stock market considers them to be pretty dead right now, and it’s the stock market that gets to decide how a stock will perform. They do not care very much about things like near-term earnings, whether Macy’s can get back in black after a period where lots of red ink flowed, and while this together with a more positive outlook on a stock can see it make a very nice move back, the outlook with Macy’s is now worse than ever.
Macy’s is having plenty of trouble keeping things together, and without their income flowing in, they have now had to resort to using their real estate as collateral for the bond funding they so desperately need now. They could sure use the $1.1 billion from this, and they are also looking to raise even more soon by using their inventory as collateral for another bond issue soon.
These moves are certainly better than the alternative, going broke, and this was actually a great move by Macy’s to help them survive the pandemic. You know that your tank is down to the fumes when you have to make moves like this though, when your doctors are down to risky procedures but have no real choice since they want to try to save your life.
Macy’s situation is far from Disney’s, which got beat up pretty badly as well but was a stock that we called at a buy at $101 as it had so much more promise, with the stock market on board with this. They are up 17% since in a little over a month and the fun is probably not over yet. This is a real bounce play, when you have a stock this oversold but the future still looking good, where Macy’s crashed with a terrible prognosis to start with.
A $1.1 Billion Dollar Ventilator is Not a Sign of Improving Health
The announcement of Macy’s new bond funding, as well as their opening a couple of stores, did get some investors excited to start last week, and by Wednesday the stock had climbed from $5.21 to $7.38, a 42% gain in just two trading days. A comeback was on in the minds of some at least, or at least it seemed so.
Macy’s did not keep going though, and gave up about half of this gain on Thursday and Friday. This sure looked like gold, and if you were day trading this you may be still smiling, but ultimately, this shine that Macy’s took on was no more than gold plating which has already started to wear away, exposing their dismal grey core.
Projections have Macy’s losing $3.78 per share in 2020, which is over half what the stock is trading at right now. They are expected to make 67 cents a share in 2021, and $1.80 in 2020, and while this may look like a comeback, the market already has these numbers and simply do not care about this particular comeback.
In 2019, for comparison, the company earned $3.56 per share, the market rose by almost a third, and Macy’s stock lost 43%. This is simply hideous enough without the pandemic, and things have gotten a lot worse in 2020, where even the most hopeful expectations will see them take several years before they even get back to doing well enough with earnings to just lose 43% in a year.
It’s not that Macy’s has no chance of sticking around, or that their stock will stay in the single digits, but leave this one to the pros who are agile enough to be able to hit and run like the ones that made some real money from this last little move. Beyond that, Macy’s is still one of the most terrible stocks out there, and has just got even more terrible, nothing investors should want to mess with given how much the market continues to dislike it, and the market always has the final say.