Retail has always been a challenging business as consumers’ tastes are constantly changing. However, due to the rise of online shopping, this difficulty has only increased, especially for retailers reliant on in-store sales. Traffic to stores has flatlined and begun to decrease in some instances – even before the coronavirus. In contrast, retailers with robust eCommerce operations have been able to offset the loss of in-store sales.

Companies like Amazon (AMZN) and big-box retailers like Walmart (WMT) and Target (TGT) are gaining market share at the expense of smaller retailers due to eCommerce sales accelerating. Before the pandemic, digital sales accounted for 14% of total retail spending, but now, it’s close to 30%. Their stocks have also been strong, making new, all-time highs at a steady clip during the pandemic.

For most retailers without the resources and reach of these behemoths, their challenge is only going to intensify as Millennials and Generation Z have completely different shopping and spending habits than older generations. Another problem is that, over the last decade, there has been an overbuilding of retail, which was based on the assumption that foot traffic would continue increasing at the same rate as the prior decade. This assumption has turned out to be incorrect.

The stock market is a forward-looking, discounting machine, so it’s already sniffed out these issues. Retail stocks, without a significant online presence, have been battered over the past few years. Many have even gone bankrupt, like Pier1, Sports Authority, JCPenney, and Sears.

There is a silver lining – retailers who have been able to successfully pivot and start growing their online sales are being rewarded by Wall Street. The most recent example is Bed Bath & Beyond (BBBY) which is up a staggering 450% in the last six and a half months.

Therefore, investors should examine struggling retailers, like Macy’s (M), who are gaining traction with online sales, as they could have similar turnarounds.

Coronavirus Impact

Macy’s has been a serious lagger for many years, as it’s down nearly 90% since its 2015 peak. And, its plight has only gotten worse due to the coronavirus. The pandemic has resulted in even more decreased foot traffic and stores being closed in many locations for months.

Even as stores have been reopening, they have higher costs due to increased spending on sanitation and social distancing measures, while foot traffic is even more depressed as a certain portion of the population chooses to shop online.

Turnarounds

Despite this bleak picture, there is hope for struggling retailers like Macy’s. Certain ones have gone from serial underperformance or even to the brink of bankruptcy to posting extraordinary returns.

From 2010 to 2013, Best Buy’s (BBY) stock fell by 75%. There were concerns that BBY was heading into bankruptcy like many electronic retailers. However, BBY was able to reverse its fortunes by investing in its e-commerce platform, improving its in-store experience, and matching any online retailers’ price.

Another example is Dick’s Sporting Goods (DKS). From mid-2016 to early-2020, DKS also declined by 75% due to slowing same-store sales and the inability to grow its e-commerce sales division. However, the pandemic led to DKS aggressively investing in its online sales channel. It also led to increased demand for sporting goods, specifically outdoor items. As a result, DKS has more than quadrupled from its March lows.

Bed Bath & Beyond

A more recent example is Bed Bath & Beyond (BBBY). Its stock seemed headed for bankruptcy and from mid-2015 to early-2020 was down 95%. However, in recent months, it’s staged an impressive turnaround.

Some of the keys to its success has been closing poorly-performing stores, aggressively investing in its online sales channel, and cost-cutting. These efforts were spearheaded by Mark Tritton, who took over the company in November 2019.

Tritton is a former Target (TGT) executive. And, TGT has also been remarkably successful in thriving in the “new normal” primarily due to the growth of online sales.

BBBY’s recent earnings report is evidence that Tritton’s turnaround plan is working. Online sales increased by 80%. It posted a surprise profit of $0.50 per share, while analysts were expecting a loss of $0.23 per share. Same-store sales increased by 6%, while analysts were expecting a decline of 2.1%. This was the company’s first increase in same-store sales since 2016.

BBBY also added 2 million new customers in the last quarter. It has also benefited from the strength in the housing market and the pandemic’s effects which has led to an increase in spending on household items.

State of Retail

Before diving into Macy’s, it’s helpful to examine the retail sector from a more, macro perspective.

America is a consumer-based economy. Other than recessions, retail spending continually trends higher, even despite all the churn in the retail industry. For example, before the Great Recession, retail spending peaked in November 2007. It exceeded this level in June 2011.

Other economic indicators like industrial production, employment, housing, and stock prices didn’t make new highs till 2013-2015.

Another remarkable development evident in the retail spending chart is the sharp rebound in recent months despite the recession and the ongoing pandemic. Retail spending is now making new highs and has remained strong despite the expiration of the enhanced unemployment insurance.

Some of this can be attributed to the Fed’s largesse and the aggressive injection of fiscal stimulus in March. Another reason is that the recession took place due to an exogenous event rather than the economy overheating. Thus, there was no buildup of excess leverage which exacerbated the previous recession and hampered the recovery.

Further, most of the job losses are in areas directly affected by the pandemic like restaurants and tourism. Workers with higher-incomes have been relatively unaffected. If anything, they have more money in their pockets due to less spending on travel, commuting, eating out, nightlife, and other types of activities.

Macy’s (M)

Investors should closely watch M in the coming months, as it has the potential for a similar turnaround. It has a positive tailwind of improving economic conditions and strong retail sales.

Before exploring the bull case, it’s important to note the challenges – there’s less demand for expensive clothes since people aren’t going to offices or social events; stores were closed for months which has led to inventory building up; foot traffic at malls remains depressed.

However, these issues are known and priced into the stock. Unlike many stocks, Macy’s is trading closer to its March lows, while most stocks are closer to their pre-coronavirus levels.

Yet, its recent earnings report showed some “green shoots” that could hint at a turnaround. Sales were above analyst’s estimates with online sales increasing by 53%. Gross margins improved from 17% to 28% due to cost-cutting. Its loss in the quarter was better than expected and was a significant improvement from the previous quarter. Additionally, it’s raised $4.5 billion of new financing which means that it has a longer lifeline to fix itself before it has to contemplate bankruptcy.

From a trading perspective, Macy’s has some attractive features including a short float of nearly 40%, and a low-risk trade setup given its sideways trading pattern over the last couple of months. Typically, buying stocks that are underperforming the market is a losing strategy.

However, the exception is during extremely bullish market conditions which is an apt description of the current environment. Specifically, stocks with high short interest have been outperforming the market. An example is Dillard’s (DDS).

Conclusion

Macy’s is an intriguing turnaround possibility. There are signs of improvement in terms of higher margins and increasing eCommerce sales. It also has a high short float ratio which means that any positive momentum could lead to a powerful, upside breakout. These are also similar characteristics with recent, retail turnaround stories like BBBY, DKS, DDS, and BBY whose stock prices are many multiples higher from their lows.

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M shares were trading at $6.17 per share on Wednesday afternoon, up $0.04 (+0.65%). Year-to-date, M has declined -62.20%, versus a 9.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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