Macy's (M) Trades Higher on Better-Than-Expected Quarter

Macy's, Inc. (M) shareholders are breathing a sigh of relief on Tuesday morning after the struggling retail chain posted a second quarter 2020 loss of $0.81 per share, $0.99 better than dismal estimates. Revenue matched modest expectations at $3.56 billion, which marks a 35.8% year-over-year decline. The company chose not to provide third quarter guidance due to continued uncertainty as a result of the COVID-19 pandemic.

Key Takeaways

  • Macy's beat second quarter earnings estimates but still reported a quarterly loss.
  • The stock is close to setting off the first confirmed buy signal since 2018.
  • The $7.50 to $7.75 price zone marks a resistance level that should be watched by interested investors.
  • A longer-term turnaround will be difficult until the pandemic runs its course.

Comparative sales fell a better-than-expected 34.7%, underpinned by an impressive 53% year-over-year rise in digital sales. The e-commerce performance is great news for the future, indicating that Macy's old-school clientele is getting more comfortable with passing up trips to the shopping mall and buying goods online. Gross margin improved to 23.6%, thanks to lower inventories and stronger final payments on clearance items.

The encouraging results could ease bearish Wall Street consensus that now translates into a "Moderate Sell" rating, based upon three "Hold" and four "Sell" recommendations. No analysts currently recommend that sidelined investors open new positions. Not everyone is following the advice, as evidenced by a recent disclosure that Raymond Dalio's Bridgewater Associates just dipped its toes in the water with a purchase of approximately 40,000 shares.

Even so, it will take more than a quarter to convince market players of a long-term turnaround, due to two major headwinds. First, brick-and-mortar department stores have been losing market share to e-commerce for years, in a paradigm shift that is unlikely to reverse. Second, and more important in the short term, a second infection wave during the colder months in North America could undermine consumer buying power, like it did in the first quarter.

Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). In other words, it is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells and the services it provides. The higher the gross margin, the more capital a company retains on each dollar of sales, which it can then use to pay other costs or satisfy debt obligations.

Macy’s Long-Term Chart (2008 – 2020)

Macy's stock fell into the single digits during the 2008 economic collapse and turned higher into the new decade, completing a round trip into the 2007 high at $46.70 in 2013. It broke out immediately, lifting in a channeled advance that posted an all-time high at $73.61 in the summer of 2015. The shift to e-commerce sales then made international headlines, triggering a downtrend that failed the 2013 breakout in November.

The decline paused in 2017 and resumed less than a year later, dropping the stock to an all-time low at $4.38 in March 2020. A quick bounce over $10 reversed at the 50-day exponential moving average (EMA) in June, but the stock is trading just above that barrier in Tuesday's pre-market session. As a result, interested investors should keep an eye on the August high at $7.75, with a breakout setting off short-term buy signals that could presage a quick trip into the double digits.

The monthly stochastic oscillator has taken on a moderately bullish look, more than a year after a major sell cycle dropped into the oversold level. The indicator failed crossovers in September 2019 and March 2020, but it has now lifted to the highest high since November 2018. In turn, this has established a third buy cycle, with a potential triple bottom providing early-but-potent evidence that the stock will gain ground into the fourth quarter.

A stochastic oscillator is a momentum indicator comparing a particular closing price of a security to a range of its prices over a certain period of time. The sensitivity of the oscillator to market movements is reducible by adjusting that time period or by taking a moving average of the result. It is used to generate overbought and oversold trading signals, utilizing a 0-100 bounded range of values.

The Bottom Line

Macy's stock is trading higher in Tuesday's pre-market session after the retailer reported a steep loss that beat second quarter 2020 estimates. This uptick could help the beaten-down retail chain establish the first technical buy signal since 2018.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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