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Macy's Counting on Strategic Initiatives to Pull it Out

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A glimpse of Macy's, Inc. M share price movement reveals that it has plunged 44.8% in the past six months compared with the Zacks categorized Retail – Regional Department Stores industry’s decline of 41.1%.In contrast, the Zacks categorized Retail-Wholesale sector advanced 11.9%. However, management is not sitting idle and instead trying every possible means to bring Macy’s back on growth trajectory.

What is Troubling the Stock?

A challenging retail landscape, stiff competition from online retailers and soft store traffic has been hurting Macy’s performance. This is quite visible from first-quarter fiscal 2017 results, wherein both sales and earnings per share declined 7.5% and 40% year over year, respectively. We noted that while net sales decreased 7.4%, 3.9%, 4.2% and 4% in the first, second, third and fourth quarters of fiscal 2016, respectively; earnings per share descended 28.6%, 15.6%, 69.6% and 3.3% during the respective quarters.

Additionally, management envisions total sales to decline in the band of 3.2–4.3% and expects comps on an owned plus licensed basis to decrease in the range of 2–3% during fiscal 2017. The company also projects adjusted earnings in the range of $2.90–$3.15 per share compared with $3.11 posted in fiscal 2016.

Initiatives Undertaken

Macy’s has announced slew of measures revolving around stores closures, cost containment, real estate strategy and investment in omni-channel capabilities to enhance sales, profitability and cash flows. Additionally, management is developing eCommerce business and Macy’s Backstage off-price business, along with the expansion of Bluemercury and online order fulfillment centers. Further, the company has been widening operations through deals and collaborations to expand customer base.

Moving ahead, we believe the company’s consistent focus on price optimization, inventory management, merchandise planning, and private label offering are the primary catalysts, facilitating in meeting customer-oriented demand and improving in-store shopping experience.

Management is realigning operations and focusing on curtailing costs. Management stated that these measures will result in annual savings of about $550 million, and would allow the company to invest an additional $250 million in enhancing digital business, store-related growth initiatives, Bluemercury, Macy’s Backstage and China.

We believe that these growth initiatives may spark a turnaround in Macy’s performance. Notably, the company carries a Zacks Rank #3 (Hold), with a VGM Score of “B” and a long-term earnings growth rate of 8.5%. However, for the time being you can focus on some better ranked stocks in the retail sector.

Three Key Picks

Investors may consider better-ranked stocks such as Best Buy Co., Inc. (BBY - Free Report) , Big 5 Sporting Goods Corporation BGFV and The Children's Place, Inc. PLCE all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Best Buy delivered an average positive earnings surprise of 33.8% in the trailing four quarters and has a long-term earnings growth rate of 11.8%.

Big 5 Sporting Goods delivered an average positive earnings surprise of 94.5% in the trailing four quarters and has a long-term earnings growth rate of 12%.

Children's Place delivered an average positive earnings surprise of 36.6% in the trailing four quarters and has a long-term earnings growth rate of 8%.

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