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Retail is in trouble. With the ease of shopping on Amazon, endless choices available online, and the industry's failure to keep up with the times, brick-and-mortar retail operations have been crushed. True tales of struggling chains, plunging stock prices and even bankruptcy have become commonplace in the once thriving retail sector.
A few retailers are stepping up to the plate by revamping and providing today's consumers what they demand. By doing so, the sinking ships are righted, ushering in the new era of retail.
One way I like to identify investment opportunities is by boots-on-the-ground observation. Looking for investment opportunities has become so ingrained that it is second nature. In other words, I do it without even thinking about it and do it all the time, even on vacation!
The first firsthand observation is how I noticed this rare winning retailer. Entering the store, it was clear that something was different. Expecting another tired, old, 1990s-style presentation of the same boring brands that I remember from the last time I entered about a decade ago, I was captivated by the uniqueness, airy feeling, and product mix.
After doing fundamental and technical research into the firms standing, it was clear that they were on the right track for a turnaround.
I first suggested purchasing the shares back in March when the stock was trading under $30. Noticing clear signs that this brick-and-mortar retailer was making moves to regain its relevance, the suggestion was made to snap up the stock on a break out above $30 per share. I wanted to make sure that the upside momentum continued above technical resistance before getting long.
Boy, did this turn out to be a significant investment!
Shares rocketed to just below my previous target price of $42 and appeared to have much more upside to come. I have upgraded the target to $50 per share because the more I study this company, the more I like it!
If you have not already guessed it, I am talking about Macy's (NYSE: M) as my favorite retail stock right now.
Here are three reasons why:
To stay relevant, Macy's has undertaken a program of purchases. Most recently, the retailer bought a minority stake in b8ta, which operates gadget stores providing an interactive shopping experience. Rather than the old model of displaying an unusable sample product on the shelf, b8ta encourages customers to handle, experience, and test the products before purchasing. The hands-on concept adds value unavailable in the online world. Also, the company provides manufacturers with real-time information so the inventory can be altered quickly.
Macy's is targeting b8ta's software package so it can quickly scale its shop within a retail shop concept. Macy calls this initiative Market@Macy's. The Market will represent both exciting start-up brands as well as established names.
The next acquisition that has me bullish is the purchase of Story. The Story mixes retail with a gallery-like presentation, where the products keep changing on a monthly basis. Not only has Macy's acquired Story to keep itself relevant, but innovative founder and CEO Rachel Shechtman has also been retained as Brand Experience Officer. The acquisition plus the brainpower behind it makes for a formidable retail plan.
2. Discounting & Fundamental Performance
A store-in-store concept that appears to be working for Macy's is called Backstage. Backstage offers continuously rotating inventory of Macy's product lines sold at discounted prices. The stock never gets stale or repetitive of the primary store thanks to different buying teams.
Currently, there are 96 Backstage locations with plans to open 100 more this year.
The discounted product concept brings an entirely different demographic into the store. Consumers seek out bargains, and Macy's Backstage delivers an ever-changing, exciting pallet of compelling deals.
Fundamentally, Macy's has outperformed estimates for the last four years. Year to date shows nearly 55% total shareholder returns as of mid-June. This number beats all its peers and even the S&P 500 as a whole.
The impressive returns are not based on froth but rather substantial numbers. The latest examples in the first quarter include adjusted earnings climbing 19%, revenues up by 3.6%, comparable sales advancing over 4% and EPS posting 20% higher than CapIQ's consensus estimate, year over year.
The metric that peaked my interest is the 5%-plus full-year earnings guidance increase. The increase reflects critical optimism about the prospects.
3. Technical Factors
While I never make investment decisions based purely on technical price factors, using technical data as support for your fundamentally derived directional bias may make sense. It is also good to help time entries.
Macy's shares have been upward trending since February, hitting highs sub $42 per share. Price has pulled back appearing to find support at $37 per share, creating an ideal buy opportunity.
Risks To Consider: Make no mistake, retail is in trouble. While Macy's is aggressively improving its game, the overall economy is the primary driver. Should the economic picture turn bearish, retail, no matter how innovative, will likely lead the plunge lower.
Action To Take: Buy Macy's now within the $37 to $39 per share price range with a target price of $52 per share.
Following the company's earnings report, volatility is elevated more than five times higher than the level it was before. That's perfect for today's setup.