The Ratings Game: Macy’s upgraded but Nordstrom downgraded, as department store category continues to shift

Macy’s Inc. stock rose 2.7% in Wednesday trading after the department store retailer was upgraded to outperform from in-line at Evercore, with analysts citing assets like real estate and an ongoing consumer shift that’s working in Macy’s favor.


shares have run up more than 73% over the past year, far outpacing the benchmark S&P 500 index
which is up 13%. The ProShares Decline of the Retail Store ETF

is down 17.8% for the period.

“Not only do we see the opportunity for Macy’s to more aggressively leverage its core assets (real estate, web traffic) to create significant incremental equity value
from the current depressed valuation, we are observing a culture and strategy shift that is embracing a more data-driven, disciplined approach to managing all aspects of the business (stores, inventory, marketing, promotions, costs, etc.),” analysts led by Omar Saad wrote.

Read: Supply chain disruptions could benefit off-price chains like TJ Maxx and Burlington Stores

Analysts admit that Macy’s stock isn’t “for the faint of heart,” as earnings per share are at risk.

Macy’s fiscal fourth-quarter FactSet consensus is for EPS of $1.99, up from 80 cents last year. The FactSet consensus for full year EPS is $4.87 after a loss of $2.21 last year.

On the other hand, Nordstrom Inc.

was downgraded to in-line from outperform at Evercore.

“[T]he company’s scaled omnichannel and BOPUS [buy online pickup in store] capabilities aren’t driving a broader sales and margin inflection, or helping the company overcome its [off-price] Rack inventory challenges or the sticky comfort and home trends that don’t align with the company’s core merchandising strengths,” analysts said.

Macy’s also has an off-price business called Backstage.

The ratings changes come amid ongoing shifts in the department store category.

Pre-COVID, department stores faced challenges associated with the consumer move online and other shifts in consumer habits.

More recently, Macy’s has faced calls from activist investors Jana Partners LLC to separate its e-commerce business from the brick-and-mortar business. The company has already announced a new marketplace and has made or proposed other changes.

Kohl’s Corp.

is also battling activist investors, with Macellum Advisors GP LLC announcing its plans to nominate a slate of 10 new board directors. Kohl’s also rejected buyout offers earlier this month.

See: Kohl’s rejects buyout offers

Department stores experienced a business slowdown during the holiday season, as sales were pulled forward with shoppers beginning their holiday gift-buying sooner amid concerns over supply chain disruptions.

“Industry concerns include slowing traffic in December; meanwhile, apparel, gifting and beauty category strength has been robust,” wrote Cowen analysts in a note published Tuesday.

“We look for higher AURs [average unit retail] and gift card productivity in January to offset cautious traffic trends. Supply is likely still constrained for the next few quarters and retailers will have to raise prices (~5% to 8% or more) to share the burden of increased COGS [cost of goods sold].”

Still, Cowen analysts have turned more upbeat about Macy’s as well, saying they prefer it over Nordstrom. Cowen rates Macy’s stock outperform with a $45 price target, and rates Nordstrom market perform with a $25 price target.

Macy’s is scheduled to report fourth-quarter earnings on Feb. 22, according to the FactSet calendar. Nordstrom is scheduled to announce its fourth-quarter results on March 1.

This post was originally published on Market Watch

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