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

J.C. Penney reboot
Macy’s also faces some more specific threats. The most important one is the ongoing transition back to a heavily promotional model at struggling competitor J.C. Penney Company, Inc. (NYSE:JCP) . J.C. Penney’s elimination of most coupons and discounts last year led to the loss of more than $4 billion in sales. Macy’s management has stated on several occasions that about half of its stores are in malls that also have a J.C. Penney Company, Inc. (NYSE:JCP), and that those stores have performed better than the company average. This trend provided a tailwind for Macy’s earnings — and Macy’s stock — throughout 2012.

J.C. Penney is expected to make a strong push to win those customers back this year, starting with the return of “high-low” pricing. This could begin to reverse the trend of J.C. Penney shoppers migrating to Macy’s, putting pressure on the latter’s revenue growth. If, as I expect, J.C. Penney really ramps up the use of discounts and coupons, this could put pressure on competitors’ gross margins. A drop in gross margin could have an even bigger impact on Macy’s earnings than a slowdown in revenue growth.

Can Macy’s stay strong?
I’ve been a big fan of Macy’s turnaround in the last few years. However, the company benefited significantly from J.C. Penney’s woes last year, and J.C. Penney could win back some market share in the second half of 2013 as it returns to a promotional model. This threat is exacerbated by the generally weak consumer spending environment. Moreover, these threats could continue to pressure Macy’s beyond 2013. As a result, Macy’s stock may be somewhat overvalued at present. Investors should keep a close eye on how well the company’s earnings hold up over the next few quarters.

The article Macy’s Stock Could Be Poised for a Pullback originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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