Macy's Mixed Results Present an Opportunistic Valuation Play Amid Dividend Resilience

Macy's Inc. (NYSE: M) reported first-quarter 2025 results that highlighted both strategic progress and macroeconomic challenges. While net sales fell 5.1% to $4.6 billion, adjusted EPS of $0.16 beat estimates, and the company's luxury segments—Bloomingdale's and Bluemercury—showed resilience. Yet, full-year guidance was slashed, reflecting tariff pressures and a cautious consumer. For investors, the mixed results create an intriguing opportunity: a stock trading at a depressed valuation with a dividend yield above 4%, offering potential upside as the retailer executes its “Bold New Chapter” strategy.

A Mixed Quarter, But a Glimmer of Strategic Success

Macy's core business struggled, with comparable sales down 2.1%, driven by softness in full-price apparel and home goods. However, its high-margin luxury segments outperformed: Bloomingdale's comparable sales rose 3.8%, fueled by partnerships with brands like Prada and Burberry, while Bluemercury's growth streak hit 17 quarters. Meanwhile, its “Reimagine 125” stores—upgraded locations with curated assortments—declined only 0.8%, outperforming the broader chain.

The Backstage off-price concept also shone, with gross merchandise value up 40%, proving demand for discounted luxury goods. This bifurcation—weakness in mass-market retail versus strength in curated, premium experiences—mirrors broader industry trends. Macy's is betting that its pivot toward luxury and experiential retail can offset broader economic headwinds.

Valuation: A Discounted Dividend Machine

Macy's stock has been punished by the market, down 29% year-to-date as of June 2025, despite its Q1 beat. The company's forward P/E of 8.5x is well below the S&P 500's ~18x multiple, reflecting investor skepticism about its ability to navigate tariffs and inflation. But this pessimism may present a buying opportunity.

The company's balance sheet remains healthy, with $1.5 billion in cash and a net debt-to-EBITDA ratio of ~1.5x. Macy's prioritizes capital returns: it spent $152 million on buybacks and dividends in Q1, maintaining a dividend yield of 4.3%—a standout figure in a market where yields are scarce.

Dividend Sustainability: A Critical Check

Macy's dividend has been cut before, most notably in 2020, but the company now appears more disciplined. The payout ratio based on 2024 EPS was ~30%, and even under the lowered 2025 guidance, the dividend's cost would remain sustainable. Management's focus on inventory management (down 0.5% YoY) and cost-cutting—such as closing unprofitable stores—supports this stability.

Risks: Tariffs, Trade Policy, and Consumer Caution

The elephant in the room is tariffs. China-sourced goods account for 20% of Macy's product mix, and new levies could squeeze margins further. The company expects a 20-40 basis point hit to gross margins in 2025, but its mitigation efforts—including supplier diversification and order renegotiations—are steps in the right direction.

Political risks loom too: potential EU tariffs on U.S. goods, though unquantified in guidance, add uncertainty. Meanwhile, consumer caution persists, with Macy's noting “choppiness” in discretionary spending.

The Bull Case: A Turnaround in Slow Motion

The bull argument hinges on Macy's ability to execute its strategy:
1. Luxury Growth: Bloomingdale's and Bluemercury could become profit engines, offsetting core declines.
2. Backstage Momentum: The off-price concept's 40% GMV growth suggests untapped potential in discounted luxury.
3. Store Reimagine: The 125-store upgrade program could improve foot traffic and margins.

If even half of these initiatives gain traction, Macy's could stabilize its sales and margins. A normalized 2025 EPS of $1.80 (midpoint of lowered guidance) would imply a P/E of 8.9x—still attractive for a dividend-focused stock.

The Bottom Line: A Buy for Income Investors

Macy's stock is a speculative play, but its dividend yield and valuation make it compelling for investors willing to endure near-term volatility. The company is positioning itself for a luxury-driven recovery, and its balance sheet gives it room to maneuver.

Investment Thesis:
- Buy: For income investors seeking a 4.3% yield with potential upside if margins stabilize.
- Hold: For those wary of macro risks but open to a rebound in consumer confidence.
- Avoid: If you believe tariffs and inflation will persistently erode retail profitability.

The next earnings report will be critical. A beat on Q2 guidance (which calls for $0.15–$0.20 EPS) could spark a rerating. According to historical performance, such instances have delivered strong returns: the strategy yielded a 177.57% return from 2020 to June 2025, though with a maximum drawdown of 28.92% and volatility of 25.31%. This underscores the potential reward, albeit with notable risk. For now, Macy's is a dividend stalwart in a cheap retail sector—worth considering for patient investors.

Joe Weisenthal is a pseudonymous analyst focused on retail and consumer trends. This analysis is for informational purposes only and should not be considered investment advice.