Macy’s vs. Nordstrom: Which Department Store Stock Is the Better Buy?

In this piece, I evaluated two department-store stocks, Macy’s (NYSE:M) and Nordstrom (NYSE:JWN), using TipRanks’ Comparison Tool below to see which is the better buy. A closer look suggests a neutral view of Macy’s and a bearish view of Nordstrom.

While both are retailers, Macy’s sells clothing, accessories, cosmetics, home furnishings, and other consumer goods through its top retail brands, which include Bloomingdale’s and Bluemercury, in addition to its flagship Macy’s brand. On the other hand, Nordstrom also manufactures clothes, shoes and accessories in addition to selling them.

Macy’s stock is off 5% year to date, although it has gained 24% over the last year. Meanwhile, Nordstrom shares have soared 23% year-to-date, accounting for nearly all of their one-year gain of 26%.

With such a dramatic difference in their share-price performances, the sizable gap between their valuations is no surprise. However, what is surprising is that Macy’s is the one with the soaring valuation, while Nordstrom appears be trading at a far more reasonable valuation, even after its rally.

We’ll compare the retailers’ price-to-earnings (P/E) ratios to gauge their valuations against each other and against that of their industry. For comparison, the department store industry is trading around its three-year average P/E of 35.2x.

Macy’s (NYSE:M)

At a trailing 12-month P/E of around 463x, Macy’s looks grossly overvalued. On a forward basis, the retailer looks far more attractive with a P/E of 6.8x, but there’s just too much uncertainty with this company right now. Thus, a neutral view seems appropriate — pending more updates.

First, Macy’s forward P/E is extremely attractive, but the problem with forward multiples is that there’s no guarantee that analyst estimates will end up being anywhere close to accurate. With some companies, that’s less of a concern, but Macy’s has such an uncertain future that it’s difficult to put too much weight on forward multiples.

The company is currently weighing an updated go-private buyout offer, but in the meantime, management is trying to turn things around. In January, Macy’s rejected the initial buyout offer from Arkhouse Management and Brigade Capital Management.

Worth $5.8 billion, the unsolicited offer amounted to $21 per share for the Macy’s shares they don’t already own. Macy’s cited financing problems as a key reason for the rejection, but neither side has been clear about what those problems are exactly.

In March, Arkhouse and Brigade followed up with a $6.6 billion offer worth $24 per share, but Macy’s hasn’t responded to that offer yet, and the focus turned to the latest earnings report. For its first fiscal quarter, the department store operator posted adjusted earnings of 27 cents per share on $4.85 billion in revenue versus the consensus estimates of 17 cents per share on $4.8 billion in revenue.

Macy’s even boosted its full-year earnings guidance and the bottom of its guided range for sales. The company also raised its expectations for comparable-store sales to between -1% and +1.5% for the full year versus the previously expected decline of up to 1.5%.

On the earnings call, management attributed the robust results to their turnaround efforts. The company stepped up investments at 50 of its Macy’s stores, and customers rewarded those investments with more frequent visits and increased spending on each visit. Those efforts include increased staffing to help customers and rolling out new brands.

Other efforts include closing about 150 Macy’s stores and investing more in the stores staying open, including its Bloomingdale’s and Bluemercury stores, which both outperformed the Macy’s stores in sales. Comparable-store sales at Bluemercury rose 4.3% year-over-year in the latest quarter, while comparable sales at Bloomingdale’s rose 0.3% on an owned-plus-licensed basis.

Meanwhile, comparable sales at Macy’s stores fell 0.4% on an owned-plus-licensed basis, and management said the 150 stores they plan to close dragged down the overall results. In fact, the 50 stores that received the increased investments notched a 3.3% year-over-year increase in sales.

Thus, there appear to be good things happening at the aging department store operator, so I wouldn’t be surprised if they reject the latest buyout offer. If that happens, there could be an opportunity to pick up a very small number of Macy’s shares at a discounted price — albeit with a note of caution due to the uncertainty that accompanies any company’s turnaround efforts.

What Is the Price Target for M Stock? 

Macy’s has a Hold consensus rating based on three Buys, five Holds, and one Sell rating assigned over the last three months. At $19.50, the average Macy’s stock price target implies upside potential of 5.6%.

Nordstrom (NYSE:JWN)

At a P/E of around 12x, Nordstrom looks undervalued relative to its sector, even after its latest rally. Unlike Macy’s, however, Nordstrom’s forward P/E is about the same as its trailing 12-month P/E, suggesting zero growth over the next year. Thus, a bearish view seems appropriate.

Again, there’s no guarantee that forward estimates will end up being correct, but it’s really discouraging that the consensus doesn’t expect any growth at all. Nordstrom’s latest quarterly results don’t inspire much confidence, either.

The retailer posted adjusted losses of 24 cents per share on $3.3 billion in revenue versus expectations of eight cents per share in losses on $3.2 billion in sales. Total revenue was up from $3.2 billion in the year-ago quarter, while net losses narrowed from $205 million in the year-ago quarter to $39 million in the recent quarter.

Nordstrom has been depending on its off-price chain Rack to drive growth, and it opened nine new Rack stores during the recent quarter, with plans to open a total of 22 new Rack stores this year. Unfortunately, Rack is lagging behind rivals like T.J. Maxx and Marshalls, which is another area of concern. However, the off-price chain did show some progress in the latest quarter, with comparable-store sales rising an impressive 7.9% year-over-year versus only 1.8% for Nordstrom stores.

Amid the concerning overall trends for the retailer, the Nordstrom family is again weighing taking the company private, but so far, no deals have emerged.

What Is the Price Target for JWN Stock? 

Nordstrom has a Moderate Sell consensus rating based on one Buy, five Holds, and four Sell ratings assigned over the last three months. At $18.89, the average Nordstrom stock price target implies downside potential of 12.1%.

Conclusion: Neutral on M, Bearish on JWN

While neither Macy’s nor Nordstrom is in a great position currently, Macy’s turnaround efforts are showing signs of paying off. The fact that the company has an offer on the table also puts it ahead of Nordstrom, which thus far hasn’t revealed any offers despite its formation of a special committee to evaluate offers.

For now, a wait-and-see approach may be best for most investors with Macy’s, although investors willing to take on some risk may consider a small position in the stock at current levels if they feel the current offer is likely to go through. However, it seems that Nordstrom has more work to do before a more constructive view would be appropriate.

Disclosure