Understanding the Bullish Case for Macy’s Inc (NYSE:M) After the Market’s Overreaction

Macy’s Inc (NYSE:M) is getting hammered after posting lower-than-expected first quarter results. The company earned $0.24 a share, worse than the average analyst estimate of $0.34. Revenue in the quarter came in at $5.34 billion, versus the consensus estimate of $5.47 billion. Comparable sales in the period dropped by 5.2%. Macy’s expects its comparable sales to decline by 2.2%-3.3% in the full fiscal 2017. Total sales in the full year are expected to be down by 3.2%- 4.3%. Macy’s Inc (NYSE:M) shares have lost about 42% over the last six months.

Despite of the bad results, several analysts think that Macy’s Inc (NYSE:M) will make a strong comeback, and the post-earning sell-off is just an overreaction by the Street due to the bleak condition of the retail industry.

Macy’s Inc (NYSE:M) is taking active measures to cut costs. It recently closed about 100 stores to downsize its store base. The results of these closures will be reflected in the second quarter results.

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Macy’s Inc (NYSE:M) is also increasing its exclusive brands, which are far more successful than widely distributed brands. In February 2018, Macy’s Inc (NYSE:M) will become the exclusive department store selling DKNY’s women apparel and fashion accessories. The company is also adapting a curated assortment inventory model to increase its sales. Macy’s Inc (NYSE:M) has embraced the “open-sell” model in several of its stores’ shoe sections. Open sell model includes putting inventory on the selling floor rather than holding it in a stockroom. These changes resulted in double-digit jump in shoe sales at the company’s pilot shoe stores. Macy’s Inc (NYSE:M) is also adding furniture and mattresses to its stores.

These measures the company believes will help boosting its overall sales. Makeup brand Blue Mercury, which Macy’s Inc (NYSE:M) acquired in 2015, is reporting a double digit comparable sales growth rate.

Macy’s Inc (NYSE:M) offers a healthy dividend yield of 6.4%. The dividend is also sustainable. The company is generating free cash flow that is twice as much as it needs to support its current payout. Macy’s earned $234 million from operations in the first quarter. Macy’s Inc (NYSE:M) is currently trading at a much lower price due to its recently announced quarterly results. Therefore, for investors that can stand the volatility, now can be a right time to consider adding Macy’s Inc (NYSE:M) stock to a portfolio and take advantage of a healthy dividend with potential for long term gains.

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