Macy's, Inc. (M)

Executive Summary / Key Takeaways

• The "Bold New Chapter" transformation is delivering measurable results: Macy's "Reimagine 125" locations are posting consistently positive comparable sales and record Net Promoter Scores, proving that strategic capital reallocation from 64 closed stores into elevated customer experiences is creating tangible value, not just shrinking the business.

• Three-nameplate portfolio provides rare diversification in retail: While Macy's flagship battles mass-market headwinds, Bloomingdale's luxury positioning generated 9% comparable sales growth (its best in 13 quarters) and Bluemercury's beauty specialty delivered its fourth consecutive year of positive comps, creating a blended business model that mitigates single-format risk.

• Credit card alliance is a stealth high-margin growth engine: Credit card revenues surged over 30% in Q3 2025 to $158 million, driven by active portfolio management and strong applications, providing a stable, capital-light revenue stream that directly funds transformation investments without diluting shareholders.

• Tariff mitigation demonstrates operational agility and pricing power: Despite 50 basis points of gross margin pressure from tariffs, Macy's expanded underlying margins by 30 basis points through strategic pricing, favorable mix shifts, and vendor negotiations, proving management can navigate external shocks while protecting profitability.

• Capital allocation discipline signals management confidence: The company repurchased $201 million in shares, refinanced debt to extend maturities, and monetized $44 million in real estate year-to-date, all while generating $679 million in free cash flow, demonstrating that the transformation is self-funded and management believes the stock is undervalued.

Setting the Scene: A 195-Year-Old Retailer Rewrites Its Final Chapter

Macy's, Inc., founded in 1830 as a dry goods store in New York and headquartered there ever since, represents both the glory and the burden of American retail history. For decades, the department store model defined middle-class consumption, offering one-stop shopping for apparel, home goods, and cosmetics under iconic brands. Yet the past 15 years have been brutal. E-commerce disrupted foot traffic, off-price retailers eroded pricing power, and mall anchors became stranded assets as consumer behavior fragmented. By 2023, Macy's was a shrinking enterprise posting negative comparable sales and burning cash on stores that had become liabilities rather than assets.

This context is crucial, as it explains why the "Bold New Chapter" strategy, launched in fiscal 2024, is not another cosmetic turnaround attempt but a fundamental reimagining of what Macy's can be. The company is intentionally becoming what management calls a "healthier, yet smaller enterprise" by shedding its least productive assets and concentrating capital on a "go-forward" business comprising approximately 350 core Macy's locations, digital channels, Bloomingdale's, and Bluemercury. This is not about saving all 700+ stores; it's about recognizing that in modern retail, scale without productivity is a trap. The strategic shift acknowledges that Macy's future lies in serving the "choiceful consumer"—a term management uses repeatedly to describe today's discerning shopper who demands curated assortments, seamless omnichannel experiences, and compelling value.

The department store sector's structure makes this transformation both necessary and possible. The industry has consolidated around a handful of players—Macy's, Nordstrom (JWN), Kohl's (KSS), and Dillard's (DDS)—each occupying distinct positions. Nordstrom commands the premium high-service segment, Kohl's dominates value-oriented suburban convenience, Dillard's owns upscale regional strongholds, and Macy's has historically tried to be everything to everyone. This positioning left Macy's vulnerable to attacks from all sides: Amazon (AMZN) and Walmart (WMT) on price, TJX (TJX) on value, and direct-to-consumer brands on curation. The Bold New Chapter directly addresses this by narrowing Macy's focus to its defendable moats while using Bloomingdale's and Bluemercury to capture growth at the high end.

Technology, Products, and Strategic Differentiation: The Reimagine 125 as a Laboratory

The core of Macy's transformation is the "Reimagine 125" program—125 Macy's locations (expanded from the initial "First 50" in early 2025) where successful initiatives are being deployed at scale. These stores are not simply remodeled; they are re-engineered with improved visual presentation, better organization, enhanced staffing, and curated brand matrices that reduce redundancies while introducing newness. In Q3 2025, these locations posted 2.7% comparable sales growth, outperforming the broader Macy's fleet and demonstrating that physical retail can still drive growth when executed correctly.

This is significant because it proves Macy's can create a replicable model for store productivity that counters the narrative that department stores are doomed. The 2.7% comp growth is not just a number—it represents customers responding to better experiences with their wallets, generating higher traffic and average unit retail. This creates a flywheel: improved sales fund further investments in store experience, which drives higher Net Promoter Scores (Macy's achieved its highest Q3 NPS on record), which in turn builds loyalty that online-only competitors cannot easily replicate. The strategic implication is that Macy's is not retreating from physical retail but rather redefining its role as a high-touch, experiential complement to digital channels.

The omnichannel integration supports this thesis. Digital sales accounted for 32% of net sales in Q3 2025, up from 30% prior year, but more importantly, the integration between channels is deepening. The new China Grove distribution facility—a 2.5 million square foot automated center opened in mid-2025—uses robotics and AI to ship more orders from a single location, improving delivery accuracy and reducing costs. This addresses a critical vulnerability: legacy department stores have higher fulfillment costs than pure-play e-commerce retailers. By modernizing its supply chain, Macy's can compete on speed and cost while leveraging its store network for buy-online-pickup-in-store services that Amazon cannot match. The facility supports all product categories, suggesting the efficiency gains will be broad-based rather than limited to specific segments.

The credit card alliance with Citibank (C), established in 2005 and extended through 2030, represents another form of technological differentiation. While not a proprietary technology, the partnership's performance—revenues up 30% in Q3 2025—demonstrates that Macy's customer data and marketing capabilities create value beyond the core retail transaction. The active management of net credit loss and strong application growth show that Macy's can monetize its customer relationships at high margins without taking credit risk. This revenue stream is critical because it is both growing and capital-light, providing a natural hedge against retail margin pressure.

Financial Performance & Segment Dynamics: Evidence of a Working Strategy

Macy's Q3 2025 results provide the first clear financial evidence that the Bold New Chapter is more than a narrative. Net sales of $4.713 billion declined 0.6% year-over-year, but this headline masks the strategic progress. The $160 million sales decline came entirely from 64 closed non-go-forward stores. Excluding these closures, net sales actually grew 2.9%—an acceleration from Q2's adjusted growth rate. This demonstrates that the go-forward business is expanding while the legacy drag is being surgically removed.

The segment performance reveals a three-speed engine. Macy's nameplate (83% of sales) posted 2% comparable sales growth on an owned-plus-licensed-plus-marketplace basis, with the go-forward business up 2.3% and Reimagine 125 locations up 2.7%. This granularity is crucial: it shows management can identify and invest in winning locations while exiting losers. The product mix shift toward fine jewelry, watches, handbags, and men's career wear—categories that outperformed overall comps—indicates successful curation that drives higher average unit retail and gross margin. Conversely, softer performance in active categories suggests disciplined inventory management rather than chasing low-margin volume.

Bloomingdale's performance is the portfolio's crown jewel. With 9% comparable sales growth in Q3—its best in 13 quarters—Bloomingdale's is capturing luxury spending that has remained resilient. New designer brands like Totême, Zimmermann, and Victoria Beckham, combined with strength in ready-to-wear, men's apparel, and fine jewelry, position Bloomingdale's as a "house of discovery" that can compete with Nordstrom's premium experience while maintaining department store breadth. Luxury retail typically carries higher gross margins and attracts less price-sensitive customers, providing a stabilizing force against macro volatility. The sequential improvement in Bloomingdale's Net Promoter Score suggests the elevated experience is resonating.

Bluemercury's steady 1.1% comparable sales growth may seem modest, but its consistency—four consecutive years of positive comps—demonstrates the defensibility of beauty specialty retail. Dermatological skincare and expanded fragrance partnerships (Parfums de Marly, Byredo, Sisley-Paris) cater to a loyal customer base with high repeat purchase rates. In an era where direct-to-consumer beauty brands are proliferating, Bluemercury's physical presence provides sampling and expertise that pure digital players cannot replicate, creating a moat of convenience and trust.

The credit card business deserves special attention. At $158 million in Q3 revenue (up from $120 million), this represents a 31.7% growth rate that far exceeds retail sales growth. CFO Thomas Edwards noted the business performed well throughout the year, with full-year guidance up approximately 20%. This is significant for three reasons: first, it is a high-margin revenue stream that requires no inventory or store overhead; second, it demonstrates the value of Macy's customer data and loyalty program (Star Rewards has over 20 million members); third, it provides a natural hedge when retail sales soften, as consumers may shift spending to credit while remaining within the Macy's ecosystem.

Gross margin performance in Q3 tells a story of operational agility. The 39.4% gross margin rate declined only 20 basis points despite a 50 basis point tariff headwind. Excluding tariffs, gross margin expanded 30 basis points through favorable inventory mix shifts and positive customer response to newness. This demonstrates pricing power and cost management capabilities that are essential in an inflationary environment. While competitors like Kohl's saw margin expansion to 39.6% through inventory optimization, Macy's achieved its result while actively investing in store experience and absorbing external shocks, suggesting underlying structural improvement.

SG&A expenses decreased $40 million (1.9%) to $2.024 billion. As a percent of revenue, this represented a decline from approximately 43.5% in the prior year to 42.9% in Q3 2025. This cost discipline is critical because it shows the transformation is not being funded by unsustainable spending. The savings come from store closures and operational efficiencies, not from starving the remaining business of necessary investment. This creates operating leverage: as the go-forward stores continue to grow comps, each incremental dollar of sales should flow through at higher margins.

Outlook, Management Guidance, and Execution Risk

Management's guidance for Q4 and full-year 2025 reveals a deliberately conservative posture that masks underlying confidence. For Q4, Macy's expects net sales of $7.35-7.5 billion with comparable sales down 2.5% to flat, and go-forward comps down 2% to flat. This guidance assumes a "more choiceful consumer" and that current tariffs remain in place. The significance lies in the fact that it sets a beatable bar. After posting adjusted EPS of $0.09 in Q3 versus guidance of a ($0.15) to ($0.20) loss, management has established credibility for under-promising and over-delivering.

The full-year guidance raise is more telling. Adjusted EPS was increased to $2.00-2.20 despite absorbing $0.25-0.35 of tariff impact and $0.07-0.08 of lower asset sale gains than originally expected. As CFO Thomas Edwards noted, this means the fundamental business performance improvement offset these headwinds, putting guidance at the same level as the beginning of the year. This demonstrates that the transformation is generating earnings power, not just one-time gains. The core adjusted EBITDA margin guidance of 7.5-7.7% reflects a healthier underlying business.

The asset sale guidance reduction—from $90 million to $60-65 million for the full year—merits attention. While this represents $0.07-0.08 of EPS headwind, it reflects disciplined capital allocation. Management is not chasing low-value real estate monetization but is being selective about transactions. This preserves long-term value; selling stores at fire-sale prices would depress future earnings potential. The $12 million in Q3 gains versus $66 million prior year shows the company is front-loading closures of the worst assets, leaving higher-quality properties for future monetization.

Management's commentary on competition reveals strategic confidence. CEO Tony Spring stated, "We are better than a year ago" and "very well positioned against other department stores for the holidays," claiming Macy's is "taking share." This suggests the transformation is not just defensive but offensive. In a market where Kohl's comps declined 1.7% in Q3 and the broader department store sector grew at only 1.4% CAGR, Macy's flat to slightly positive performance indicates relative share gains. The ability to maintain pricing and assortment discipline while competitors resort to deeper promotions positions Macy's for margin recovery when the promotional environment normalizes.

The "choiceful consumer" framework is central to management's outlook. By acknowledging that lower-income consumers are growing spending at just 0.6% year-over-year while higher-income households grow at 2.6%, Macy's is preparing for a bifurcated holiday season. Why does this matter? Because it explains the focus on luxury (Bloomingdale's) and beauty (Bluemercury) while carefully curating Macy's assortments toward higher-margin categories. The strategy is not to chase the bottom of the market but to capture the spending of consumers who remain active but selective.

Risks and Asymmetries: What Could Break the Thesis

The most material risk is execution failure on the remaining store transformations. While the Reimagine 125 locations are outperforming, Macy's still operates hundreds of stores in various stages of decline. If the successful initiatives cannot be scaled efficiently to the remaining go-forward fleet, the transformation stalls. The market has already priced in continued improvement; any slowdown in comp growth at reimagined stores would signal that the model is not replicable, undermining the entire strategy. Investors should monitor quarterly performance of the Reimagine 125 cohort specifically—if their outperformance narrows, the thesis weakens.

Consumer discretionary spending represents a macro risk that management cannot control. The guidance explicitly incorporates a "more choiceful consumer," but a severe recession could push even affluent shoppers to pull back sharply on apparel and home goods. Macy's debt-to-EBITDA ratio of approximately 3-4x (based on enterprise value and EBITDA metrics) leaves less cushion than leaner competitors like Dillard's (debt-to-equity of 0.27). While Macy's generated $679 million in free cash flow in 2024, a 10-15% decline in sales could quickly erode this buffer, limiting flexibility for further investments or forcing dilutive equity raises.

Competitive pressure from indirect channels intensifies daily. Amazon's same-day delivery capabilities and Walmart's everyday low pricing create a vice on both convenience and value. TJX Companies continues expanding its off-price footprint, directly targeting Macy's price-conscious shoppers. Macy's must maintain gross margins near 40% to fund its transformation while competitors operate on thinner margins. If the promotional environment escalates beyond current levels, Macy's may be forced to sacrifice margin for volume, delaying the turnaround. The 32% digital penetration, while improved, still lags behind best-in-class omnichannel retailers, leaving a gap that competitors can exploit.

The credit card revenue stream, while currently a strength, contains hidden concentration risk. The alliance with Citibank expires in March 2030, and renegotiation could alter the economics. More immediately, if consumer credit quality deteriorates or if regulatory changes impact interchange fees, this high-margin revenue could decline. Credit card revenues contributed $38 million of the $40 million increase in other revenue in Q3. Without this tailwind, total revenue growth would have been flat, and SG&A leverage would have been negative. The credit business is masking underlying retail softness, making it a critical dependency.

Real estate monetization faces a timing risk. The company has committed to closing approximately 150 underperforming stores by end of fiscal 2026, but the $44 million in year-to-date gains is well below the $103 million achieved in the prior year period. If commercial real estate markets weaken or if Macy's cannot find buyers for its mall-based properties, the asset sale program could fall short of targets. These gains are funding transformation investments and supporting EPS. A shortfall would force Macy's to either cut investment (slowing the turnaround) or increase debt (weakening the balance sheet).

Valuation Context: Pricing a Transformation Story

At $21.47 per share, Macy's trades at a market capitalization of $5.71 billion and an enterprise value of $10.50 billion. The valuation multiples reflect a market skeptical of the turnaround but acknowledging the potential. The price-to-sales ratio of 0.25x sits well below Nordstrom's 0.53x and Dillard's 1.53x, suggesting investors view Macy's core retail business as having lower long-term value. However, the price-to-free-cash-flow ratio of 7.16x is more attractive than Nordstrom's 9.66x, indicating the market is giving some credit for cash generation.

The enterprise value-to-EBITDA multiple of 7.14x compares favorably to Kohl's 7.20x but trails Dillard's 10.66x. This positions Macy's as a value play relative to better-performing peers, but also suggests the market demands a discount for execution risk. Dillard's superior 11.08% operating margin and 28.98% ROE justify its premium; Macy's 0.77% operating margin and 11.26% ROE show the gap that must be closed.

The balance sheet provides both support and constraint. With $447 million in cash and a current ratio of 1.25x, liquidity is adequate for the next 12 months. However, debt-to-equity of 1.21x is higher than Dillard's 0.27x and creates interest expense of approximately $100 million annually. This limits financial flexibility. While the July 2025 debt refinancing extended maturities to 2033, the 7.38% coupon on the new $500 million notes is relatively expensive, reflecting the market's view of Macy's credit risk. The company targets an adjusted debt-to-adjusted EBITDA ratio of 2.5x or below, aligning with investment-grade metrics, but current leverage appears above this target, constraining capacity for large-scale M&A or aggressive buybacks.

The dividend yield of 3.21% provides income support for shareholders, with a payout ratio of 42.41% indicating sustainability. However, the yield is partly a function of a depressed stock price rather than generous policy. The $1.20 billion remaining share repurchase authorization represents 21% of the current market cap, giving management significant firepower to signal confidence. The $201 million repurchased year-to-date shows they are already deploying this tool.

Conclusion: A Credible Turnaround at a Discounted Price

Macy's investment thesis hinges on a simple but powerful idea: a 195-year-old retailer can surgically remove its cancerous assets while nurturing its healthy ones, emerging as a smaller but sustainably profitable enterprise. The Q3 2025 results provide the first concrete evidence that this transformation is working. The Reimagine 125 stores are comping positively, Bloomingdale's is thriving in luxury, Bluemercury remains steady, and the credit card business is growing at 30% rates. Combined with disciplined SG&A management and successful tariff mitigation, these factors produced an adjusted EPS beat that defied guidance and market expectations.

The critical variables that will determine whether this thesis plays out are: (1) the pace at which Macy's can expand the Reimagine 125 playbook to its remaining go-forward stores without diluting returns, and (2) the resilience of consumer spending in Macy's core middle-income demographic amid economic uncertainty. If the company can maintain 2-3% comp growth in reimagined locations while closing the remaining underperforming stores by 2026, the operating leverage should drive EBITDA margins toward the 8-9% range, justifying a higher multiple. If consumer spending cracks more severely than management's "choiceful consumer" model anticipates, debt service could become burdensome and stall the transformation.

The stock's valuation at 0.25x sales and 7.16x free cash flow embeds significant skepticism, creating an asymmetric risk/reward profile. Downside is cushioned by real estate value, credit card cash flows, and a 3.2% dividend yield. Upside requires execution but offers multiple expansion toward peer levels if Macy's can demonstrate that its go-forward business is structurally more profitable than the legacy chain. The transformation is not complete, but for the first time in years, the trajectory is credible and the numbers are moving in the right direction.