Macy's: A Real Turnaround That's Already Done the Hard Work

Macy's: A Real Turnaround That's Already Done the Hard Work

Berkshire Hathaway quietly doubled down on Macy's in the second quarter of 2026, increasing a tiny 0.06% portfolio position by roughly 140%. The move, executed between roughly $16.75 and $24 per share, came under Greg Abel's watch after he inherited the investment portfolio in January. What's notable about this bet is not that Berkshire sees something Wall Street can't — it's that the fundamentals Macy's has delivered over the past two quarters make the valuation gap the real question to answer.

The company trades at 9 times trailing earnings, 0.26 times sales, and 3.7 times EV/EBITDA. By any textbook multiple, the stock is cheap. But the forward picture — 24 times next-year earnings — tells a different story. The market is discounting tariff headwinds, soft guidance, and the perennial fear that department stores are a dying breed. The question for a retirement portfolio is whether the gap between the cheap trailing multiples and the expensive forward multiple reflects real risk or over-discounted fear. The evidence points to the former, but only partially.

The Debt Gate Is Clear

The first thing that has to check out on any value play is the balance sheet. Macy's carried $11.5 billion in total debt as of the trailing twelve months, which looked heavy for a retailer of its size. But the company's actual reported debt at the start of fiscal 2026 was $2.4 billion — dramatically lower — with no material long-term maturities until 2030. The company ended Q1 fiscal 2026 with $1.3 billion in cash, $2.0 billion in available borrowing capacity, and a debt-to-equity ratio of 50.3%.

That is not a leveraged trap. It is a manageable balance sheet with ample liquidity cushion. The debt-to-equity figure, while above zero, is not alarming for a retailer that generates material free cash flow. The absence of near-term maturities removes the refinancing cliff that has crippled other legacy retailers.

The Turnaround Is Real, Not Aspiring

Comparable sales — the measure of sales at stores open at least a year, the standard indicator of organic health — turned positive in fiscal 2025 with 1.5% growth. In Q1 fiscal 2026, comparable sales grew 3.0%, the strongest first quarter in four years. Reimagine stores — the locations being renovated as part of the company's footprint strategy — posted 2.4% comparable sales growth. Bloomingdale's delivered 10.2% growth, its record first quarter and seventh consecutive quarter of gains.

The mechanics behind the improvement are structural, not cyclical. Macy's closed 150 underperforming stores and invested in approximately 350 stronger locations. The cost savings from closures (SG&A dropped $90 million year over year despite investments) are permanent. The digital and luxury push through Bloomingdale's and Bluemercury is building a higher-margin revenue mix. Other revenue — credit card and media network — grew 20% in fiscal 2025 and added $857 million, diversifying beyond traditional retail margins.

The Cash Flow Engine

Free cash flow surged 310% year over year to $1.046 billion on a trailing basis. Fiscal 2025 saw $0.8 billion in free cash flow and $1.4 billion in operating cash flow. That cash supports both dividend service and debt reduction simultaneously. The company returned $448 million to shareholders in fiscal 2025 — $197 million in dividends and $251 million in buybacks — $197 million in dividends and $251 million in buybacks — while still holding $1.1 billion remaining under its $2.0 billion repurchase authorization.

For an income-oriented reader, the dividend yield sits at 3.3% with 22 consecutive years of payments and a payout ratio of roughly 30%. That is a comfortably covered dividend. A 30% payout ratio means the company is returning only about a third of its earnings to shareholders as dividends, leaving the rest for reinvestment, debt reduction, or additional buybacks. That is the dividend-safety profile a retirement portfolio wants.

The Valuation Gap — and Why It Narrows at Current Prices

Here is where the picture gets more nuanced. The trailing multiples scream value — 9 times earnings, 0.26 times sales, 3.7 times EV/EBITDA. But Macy's stock is up roughly 69% over the past 12 months and 21% over the last four months. The market has been doing much of the valuation repair work that makes the trailing multiples look cheap. They are cheap because last year's earnings were unusually low during the turnaround inflection, not because the company's cash-generating power is permanently impaired.

The forward PE of 24 times reflects adjusted diluted EPS guidance of $2.00 to $2.20 for fiscal 2026. At the midpoint of $2.10 and a share price near $23, that multiple isn't exactly generous — but it's not a screaming value either. The company raised guidance in June, lifting the comparable sales outlook from (0.5%) to 0.5% up to 0.5% to 1.2%, and pushing the adjusted EPS range from $1.90-$2.10 up to $2.00-$2.20. That raise was a constructive signal. But the guidance still reflects caution on tariffs, which management expects to hit gross margins by 30 basis points in the first half of fiscal 2026.

Peer context matters. Dillard's, a smaller but structurally comparable department store operator, trades at 14 times trailing earnings with a 5% dividend yield. TJX — the off-price chain that has eaten into department store market share — trades at 25 times earnings and commands a premium for its growth model. Kohl's, at 7 times earnings and struggling with its own transformation, offers the low end of the spectrum. Macy's sits between the turnaround uncertainty of Kohl's and the proven model of Dillard's, but without the growth premium that TJX enjoys. The 9 times trailing earnings is reasonable for a company with a demonstrated path to comparable sales growth and clean debt, but the 24 times forward multiple asks investors to believe the turnaround sustains without stalling.

The Counterpoint — What Could Go Wrong

The consumer is the load-bearing risk. Macy's guidance for fiscal 2026 assumes comparable sales growth of 0.5% to 1.2% — positive but thin. That is not the kind of margin for error that makes a thesis bulletproof. Tariffs add further headwind: a 30-basis-point gross margin hit is material when the company's operating margin is 4.6%. Store closures are removing roughly $145 million in annual sales, and while management frames this as shedding underperforming locations, the transition is always messier in practice.

Revenue growth year over year is essentially flat at negative 0.3%, and the Q2 QoQ revenue decline of 38.2% reflects the severe seasonality of a retailer whose holiday quarter dominates the fiscal year. The earnings calendar means most of the annual profit arrives in Q4, so a weak holiday season could undermine the full-year case.

The Berkshire Signal

Berkshire's position in Macy's is tiny — 0.06% of the portfolio, valued at roughly $173 million after the Q2 increase. That is not a conviction bet. It's a test position, the kind of small starter stake Berkshire often takes to evaluate a business before committing more capital. It's also consistent with the broader pattern in Abel's early moves: a net buyer ending a 14-quarter selling streak, adding to names with cash generation and tangible assets. The fact that the position was initiated between $16.75 and $24 means Berkshire has cost basis well below the current $23 price — and the Q2 increase suggests they were comfortable adding before the recent run.

But Berkshire's small position is not a reason to load up. It's a signal that the company has passed an initial quality screen, not a declaration that the current price is compelling.

The Rating

Macy's is a company with real fundamental improvement: declining debt, positive comparable sales, a Bloomingdale's catalyst that is delivering, and free cash flow growth that supports both the dividend and additional shareholder returns. The 3.3% yield on a 30% payout ratio is retirement-portfoliworthy income.

But the valuation gap that makes the trailing multiples look compelling has narrowed materially over the past year. The 69% price run has done much of the work. At 24 times forward earnings, the stock is pricing in a smooth continuation of the turnaround. If comparable sales stay in the 1-2% range, margins hold through tariff pressure, and Bloomingdale's continues to outperform, the thesis holds and the dividend compounds. If consumer spending stumbles or tariffs bite harder than guided, the forward multiple compresses and the trailing multiples stop looking like value.

Rating: Hold. The business has improved in ways that matter — debt is manageable, cash flow is strong, the dividend is safe. But the entry point has moved. For a retirement portfolio that already holds Macy's, the position is worth keeping. For someone looking to initiate, waiting for a pullback below $20 — closer to Berkshire's average cost basis — would provide a more defensible valuation margin.