Macy's

For the second quarter, Macy's posted 2.7% comparable sales growth on increases of 1.1% at its eponymous concept, 11.3% at Bloomingdale's, and 6.2% at Bluemercury. Excluding a tariff refund, adjusted earnings per share rose to $0.40 from $0.35 on sales growth and operating cost leverage.

Why it matters: Macy's plan to increase luxury sales, operate more efficiently, and upgrade its namesake stores continues to improve results at Bloomingdale's, Bluemercury, and remodeled Macy's locations. After two years of declines, the company has had five consecutive quarters of comparable sales gains. Macy's comparable sales were 2 percentage points better than our 0.7% estimate, and adjusted EPS beat our $0.35 forecast by $0.05 (excluding a tariff refund). One encouraging sign of progress on its premiumization plan is that average unit retail prices rose 9%. In the long run, we project Macy's yearly same-store sales growth at 0.5% and operating margin at 4.5% (about 4% recently). Our expectation is that the company can improve margins through its strategic plan and store closures, but gains are likely to be limited without stronger sales growth.

The bottom line: No-moat Macy's shares are undervalued relative to our $25.50 fair value estimate, which we do not expect to change materially. We think investors are discounting the gains that Macy's has achieved in its operating results and balance-sheet health. Shares fell about 3% early on Sept. 10 as third-quarter guidance for adjusted EBITDA margin of 3.5%-4% and an adjusted loss per share of $0.19-$0.23 was below our forecast. However, 2026 guidance for comparable sales growth (1%-1.5%) and adjusted EPS ($2.15-$2.35) aligns with our expectations. Given higher gas and transportation prices and economic conditions, Macy's may be ramping up spending to support sales. We think this is a reasonable strategy to defend share, but it is also indicative of how Macy's weak competitive position limits its ability to drive margin gains.

We raise our fair value estimate on Macy’s shares to $26.00 from $25.50 after the firm outperformed our expectations in the second quarter of 2026. The firm posted 2.7% comparable sales growth on increases of 1.1%, 11.3%, and 6.2% at its eponymous concept, Bloomingdale's, and Bluemercury, respectively. Excluding a tariff refund, adjusted EPS rose to $0.40 from $0.35 on sales growth and operating cost leverage. Macy's comparable sales were 2 percentage points better than our 0.7% estimate, and adjusted EPS beat our $0.35 forecast by $0.05 (excluding tariff refund).

With high uncertainty regarding economic conditions, Macy’s has issued lukewarm guidance for 2026 comparable sales (1.0%-1.5%). For the year, we project $1.8 billion in adjusted EBITDA (7.9% margin) and adjusted EPS of $2.37 (up from $2.23 previously) on 0.5% revenue growth. For 2027, we project a 1.6% revenue decline on store closures, $1.78 billion in EBITDA (8.0% margin), and $2.32 in EPS (from $2.27). Based on these 2027 projections, our valuation implies a P/E of 11 times and an enterprise value/EBITDA of 5 times.

Macy’s continues to post better comparable sales trends at its upgraded stores and at its Bloomingdale’s and Bluemercury subsidiaries. More consistency in terms of profitable growth in these segments is core to the Bold New Chapter strategy.

Macy’s received interest from potential buyers in the first half of 2024, but no deal materialized. Soon after, a different activist group called for changes, including greater share repurchases and the creation of a separate entity to monetize real estate. We think Macy’s board should seriously consider buyout offers that are at or above our $26 per share fair value estimate.

In the long term, we are not confident that Macy’s growth plans, such as the shift to smaller-format stores and luxury, will overcome weakness in mall-based retail. While the firm has a large customer base of more than 40 million and about three-fourths of its sales come from loyalty members, evidence suggests many Macy’s customers shop at the stores infrequently. We do not think the firm can gain market share since online and offline competition will intensify despite some store closures by rivals. In the long run, we forecast yearly comparable sales growth of just 0.5%.

We anticipate that Macy’s selling, general, and administrative (including advertising) expenses as a percentage of revenue in the next decade to remain high at around 32%, as we believe the firm will have to spend heavily on marketing, e-commerce, and other initiatives to stay competitive. We forecast its long-term operating and adjusted EBITDA margins around 4.5% and 8.5%, respectively.

We expect Macy’s total gross margin to stabilize at roughly 40%, in line with prepandemic levels. Excluding credit card and marketplace operations, we forecast gross margins at 38% in the long term. Macy’s may maintain its recent solid gross margins if it increases sales of its luxury offerings, private-label, and exclusive brands. The company also plans for $235 million in run-rate annual cost savings from its supply chain investments under its strategic plan.

We assign a no-moat Morningstar Economic 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 has declined to less than $23 billion 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 returns on invested capital, including goodwill, have been below our 9% weighted average cost of capital estimate in each of the past three years, and we forecast they will average just 7% over the next decade. These subpar returns support our view that Macy's has no competitive edge.

Although Macy’s is the largest traditional US department store company by sales, the relevance of this channel has been in decline. Indeed, in the last two decades, several department store companies have folded, and thousands of stores have been closed. According to Euromonitor, total US department store annual sales declined by half between 2008 and 2025 (to about $56 billion from $112 billion).

The primary cause of the weakness in the department store channel is the loss of shoppers to a multitude of competitors. Many categories, such as furniture, hardware, and consumer electronics, have been all but abandoned by department stores due to share loss to specialty and big-box stores. As such, Macy’s, like many of its closest competitors, generates nearly all its sales from just a few categories, namely clothing, footwear, accessories, beauty products, and home goods. Although these are sizable categories, department stores compete with stores and online channels operated by specialty clothing brands, off-price stores, mass stores, their vendors, and e-commerce companies. Between 2010 and 2025, the share of footwear and apparel sold through retail e-commerce skyrocketed to 39% from 9%, while department stores’ share fell to just 5.5% from 17% (per Euromonitor).

Macy’s has built an off-price business within its full-price stores to compete with discounters such as Ross and TJX. Macy’s operates close to 300 lower-priced shops known as Backstage, nearly all of which are located within its existing stores. While the company promotes Backstage as a major strategic initiative, we consider it mostly defensive. Despite its claims, we are uncertain if Backstage is additive, as overall sales numbers have been weak despite the growth of the concept.

E-commerce is another of Macy’s key strategic priorities. The firm has invested heavily in its digital capabilities, with an emphasis on mobile, same-day delivery in major markets, and buy online/pick up in store. It is also building a digital marketplace for brands that are not sold in its physical stores. In 2025, its digital sales were approximately $7.6 billion, or 35% of its total sales. However, as Macy’s reported negative same-store sales in seven of the past 11 years, the growth of its e-commerce has clearly not been enough to overcome sales declines in its physical stores.

Macy’s is trying to improve its merchandizing, including its private-label offerings. Company-owned brands like account for about 15% of total sales and have better gross margins than some third-party merchandise. However, while private-label apparel may be profitable, it does not seem to drive store traffic, which is one of Macy’s biggest weaknesses.

On the other end of the spectrum, Macy’s has ambitions to increase its luxury sales. The Macy’s brand is not typically associated with luxury and designer merchandise, but its Bloomingdale’s subsidiary is comparable to upscale department stores Nordstrom, Saks Fifth Avenue, and Neiman Marcus. However, like the middle-class department stores, luxury department stores are struggling to stay relevant. For years, they have been negatively affected by direct selling of luxury items by the brand owners, as well as e-commerce channels.

Macy’s defends its beauty business with its Bluemercury subsidiary, but we think it will continue to lose share in the category. Although large department stores were once the primary retailers of prestige beauty products in the US, the industry’s retail model has adapted to the channel’s ongoing woes. Like its peers, Macy’s beauty business has been squeezed by the introduction of many specialty brands, direct selling by key vendors, e-commerce, and the growth of cosmetics stores like Sephora (owned by wide-moat LVMH) and Ulta. Between 2008 and 2025, department stores’ share of US beauty and personal care retail fell to 4.1% from 10.6%, while that of beauty specialists rose to 12.8% from 9.9% (per Euromonitor). To become more competitive, Macy’s acquired beauty specialist Bluemercury’s proprietary brands and 62 stores in 2015. While Bluemercury has since grown to 170 locations, it still has far fewer stand-alone stores than either Ulta or Sephora, and its stores are relatively small.

Beyond intangibles, we do not believe any other moat sources can be applied to Macy’s. The company has no production cost advantage, as it sources its apparel from many of the same manufacturers as other fashion retailers. We do not believe it has the power to negotiate lower prices from producers. Macy’s does not have an efficient scale advantage, either, as its distribution system is like that of competitors. There is no network effect in the apparel retailing business, and switching costs are nonexistent.

The Macy’s stores that have received remodels and upgrades in service and merchandise have outperformed others in the fleet. The implementation of these changes in the remaining stores could improve the company’s overall performance.

Macy’s owns significant real estate that can be sold to provide liquidity, pay down debt, and finance new investments.

Luxury retailer Bloomingdale’s and Bluemercury have been bright spots for Macy’s. Although these concepts account for less than 20% of total sales, Bloomingdale’s and Blumercury likely have solid margins and sales growth.

Macy’s has been closing stores and implementing turnaround plans for years, but it and other department stores continue to lose share in the US retail market.

Cost-cutting and efficiency efforts have failed to have a significant positive impact on Macy's margins.

Macy's Backstage and small-format stores have failed to generate much sales or margin growth. Plans to expand these concepts have seemingly been abandoned.