Is Macy's Stock Mispriced Amid a Strong Rally and Contradictory Valuation Signals?

The stock of Macy's, Inc. (M) has experienced a notable rally in 2025, driven by a combination of strategic reinvention, improved operational metrics, and a broader retail recovery. Yet, beneath the surface of this resurgence lies a valuation puzzle: while relative metrics like the price-to-earnings (P/E) ratio suggest undervaluation, intrinsic valuation models such as discounted cash flow (DCF) analysis yield conflicting signals. This tension between quantitative signals and qualitative narratives raises critical questions about whether the market is underappreciating Macy's turnaround or overhyping its prospects.

Relative Valuation: A Compelling Case for Undervaluation

Macy's current P/E ratio of 12.62, as of December 2025, is significantly below its 10-year historical average of 13.15 and the Consumer Cyclical sector average of 19.18 according to fullratio.com. This discrepancy suggests that the market may be discounting the company's earnings at a premium to its historical norms and sector peers. The trailing twelve months (TTM) P/E of 7.53 further amplifies this divergence, reflecting a sharp decline from prior years . Such a low multiple could imply that investors are either skeptical about Macy's long-term growth potential or have not fully priced in its recent operational improvements.

For context, Macy's 2025 full-year net income surged by 1,193% to $582 million, while operating income jumped 202% to $909 million . These figures, coupled with a stock price of $22.71, create a compelling earnings yield of approximately 7.8% (1/TTM P/E). In a low-interest-rate environment, such a yield could justify a re-rating, particularly if the company sustains its earnings momentum under its "Bold New Chapter" strategy.

Intrinsic Valuation: A Mixed Picture of Free Cash Flow and Growth

The DCF analysis, however, paints a less certain picture. Macy's free cash flow (FCF) in Q3 2025 was -$190 million, according to Yahoo Finance, an improvement from -$384 million in Q3 2024, but still negative. Analyst projections for FCF are equally contradictory: one model anticipates a rise to $656 million by 2026 and $689 million by 2035, while another forecasts a peak of $563 million by 2028 followed by a decline to $441.8 million by 2035. These divergent assumptions highlight the uncertainty surrounding Macy's ability to generate consistent cash flow amid challenges like tariffs, store closures, and digital transformation costs.

The absence of reliable data on Macy's weighted average cost of capital (WACC) and long-term growth rate further complicates the DCF model . Without a clear discount rate or growth assumptions, it is difficult to determine whether the intrinsic value derived from these cash flow projections justifies the current stock price. If the market is using overly optimistic FCF estimates, the DCF model could overstate intrinsic value, creating a misalignment with the company's fundamentals.

Contradictory Narratives: Strategic Resilience vs. Structural Risks

The disconnect between relative and intrinsic valuations reflects broader tensions in Macy's business model. On one hand, the company's "Bold New Chapter" strategy-focused on real estate optimization, digital expansion, and private-label growth-has delivered tangible results. Q2 2025 comparable sales rose 0.8% on an owned basis, the strongest growth in 12 quarters, while adjusted EBITDA margin held steady at 7.9% of revenue according to Yahoo Finance. These metrics suggest a disciplined approach to cost management and asset rationalization.

On the other hand, structural risks persist. The retail sector remains highly competitive, with shifting consumer preferences and macroeconomic headwinds. Macy's reliance on tariffs in the latter half of 2025 introduces volatility, as does its exposure to real estate costs. Additionally, the company's historical P/E volatility-peaking at 116.44 in 2024 and bottoming at 3.36 in 2022-underscores the market's cyclical skepticism.

Conclusion: A Stock at the Crossroads

Macy's stock appears to occupy a liminal space between undervaluation and overvaluation. The low P/E ratio and strong earnings growth suggest the market is not fully crediting the company's operational turnaround. However, the DCF analysis, constrained by conflicting cash flow projections and missing inputs, fails to provide a definitive intrinsic value. This ambiguity leaves investors with a critical choice: bet on the company's ability to sustain its recent momentum and justify a higher multiple, or hedge against the risk of overpaying for a recovery that may not materialize.

For now, Macy's stock offers a compelling case study in the limitations of valuation models when applied to companies navigating complex transitions. As the retail landscape evolves, the resolution of this valuation puzzle will depend not only on financial metrics but also on the company's capacity to adapt its strategy to an increasingly dynamic market.