Macy's has gotten torched over the last six months - since November 2024, its stock price has dropped 29.5% to $11.60 per share. This might have investors contemplating their next move.

Is now the time to buy Macy's, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Macy's Will Underperform?

Despite the more favorable entry price, we're cautious about Macy's. Here are three reasons why M doesn't excite us and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Macy’s demand has been shrinking over the last two years as its same-store sales have averaged 4.7% annual declines.Macy's Same-Store Sales Growth

2. Revenue Projections Show Stormy Skies Ahead

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Macy’s revenue to drop by 5.6%, a decrease from its 1.9% annualized declines for the past five years. This projection doesn't excite us and indicates its products will face some demand challenges.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Macy's historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.4%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

Final Judgment

We see the value of companies helping consumers, but in the case of Macy's, we’re out. After the recent drawdown, the stock trades at 5× forward P/E (or $11.60 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.

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