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The Ratings Game

Aug. 20, 2021, 3:41 p.m. EDT

JPMorgan upgrades Macy’s as balance sheet and merchandise get back in shape

Tonya Garcia

Macy’s Inc. has cut $900 million in expenses, trimmed its fleet of stores to focus on top malls and shopping centers, and made digital investments that are paying off, according to JPMorgan, which upgraded the department store retailer to neutral from underweight.

JPMorgan also raised its price target to $25 from $19.

The stock rose 2.2% in morning trading Friday, after soaring 19.6% to a two-year closing high on Thursday.

The upgrade comes after Macy’s (NYS:M) second-quarter earnings beat expectations. The results were accompanied by news of an expanded partnership with Toys ‘R’ Us , a raised outlook, a reinstated dividend that put it among the top yields in retail , and a new $500 million share buyback program.

See: Macy’s partnership with Toys ‘R’ Us is part of a merchandise strategy that has worked for Target

JPMorgan analysts credit Macy’s Polaris business strategy for the improvements, and think the company’s outlook is conservative when considering a number of factors, including a tourism tailwind. Tourism was tied to $860 million in sales before COVID hit, according to analysts.

Cowen analysts were also upbeat, citing the Polaris strategy.

“Early results from its Polaris strategy in action combined with a healthy consumer backdrop are supporting stronger-than-expected top- and bottom-line momentum,” wrote Cowen analysts.

“We like the moves Macy’s is making to improve its category relevance, e-comm features, and supply chain capabilities, which will support a healthier long-term outlook.”

Still, analysts are looking for sustained revenue and margin trends.

Cowen rates Macy’s stock market perform with a $23 price target, up from $21.

Also: Walmart and Home Depot beat earnings expectations but a number of factors are putting a squeeze on the consumer shopping spree

GlobalData praises the changes, but says there are still fundamental problems the retailer has to address.

“Most stores are a hot mess, with a complete lack of care in merchandising and presentational standards. There is still too little curation of the assortment. And the roll out of potentially game changing initiatives, such as Market by Macy’s, are proceeding at a glacial pace,” wrote Neil Saunders, managing director at GlobalData.

Now that the company has paid down some debt, including $1.3 billion in senior secured notes announced this week, there’s money to make further changes. But Macy’s is losing market share, Saunders said. 

“At best, its performance can be described as treading water. This is a concern as it reinforces our view that Macy’s current results come down to riding the wave of consumer spending rather than of charting its own course to long-term success,” he wrote.

Macy’s stock has soared 98.1% for the year to date while the S&P 500 index (S&P:SPX) has gained 18.3%.

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