Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Macy’s, Inc. (M): The Stock Could Be Poised for a Pullback

Macy’s, Inc. (NYSE:M) has bounced back strongly from the Great Recession, with the share price rising more than sevenfold since bottoming below $6 in late 2008. CEO Terry Lundgren has done a lot of things right as he has turned the company around: customizing store inventories, improving selling techniques, and rapidly growing online sales. Nevertheless, Macy’s, Inc. (NYSE:M) stock is starting to seem overvalued in light of a few challenges that may hurt its future growth.

M Chart

Macy’s Stock 5-Year Price Chart, data by YCharts.

Macy's, Inc. (NYSE:M)As of Friday’s close, Macy’s, Inc. (NYSE:M) stock traded for $43.54, which is 12.6 times last year’s adjusted EPS of $3.46. If, as analysts expect, Macy’s, Inc. (NYSE:M) continues to grow EPS at a double-digit rate, this is a fair price. However, there are a few factors that could cause earnings growth to stall out, leading to a significant correction in the stock.

Consumer spending takes a hit
The biggest headwind for retail stocks in general — and Macy’s, Inc. (NYSE:M) stock in particular — is the sluggish consumer spending environment. The U.S. economy will be pinched this year by the combined effects of higher payroll taxes, higher income taxes on the wealthy, and lower government spending. These headwinds have led to shaky consumer confidence readings in recent months, and may already be impacting retail sales. According to the U.S. Department of Commerce, March retail sales fell 0.4%, following a 1% gain in February.

Discounters such as Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) have reported top-line pressure as consumers cut back on discretionary spending. Target recently announced that same-store sales will be flat in the first quarter and earnings will miss the company’s earlier guidance due to unseasonably cold weather in much of the country. To some extent, Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) are more at risk than Macy’s, Inc. (NYSE:M) in the current economic environment, because their customers are more likely to live from paycheck to paycheck. However, the effect of bad weather on seasonal merchandise sales could hit Macy’s, Inc. (NYSE:M) as well. A sales or earnings miss this quarter could cause investors to reevaluate Macy’s stock, because the company has consistently beaten estimates in recent quarters.

Moreover, discount retailers have not been the only ones to strike a cautious tone. Upscale department store Nordstrom, Inc. (NYSE:JWN) provided a 2013 revenue and profit outlook that missed analysts’ expectations back in February. In fact, Macy’s was one of the few major retail chains to offer a solid 2013 outlook. With other successful retailers above and below Macy’s on the price ladder expecting a challenging year, Macy’s shareholders may need to rein in their expectations.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading...