Cowen upgrades Macy’s, sees 30% upside

Yahoo Finance's Brian Sozzi breaks down Cowen's decision to upgrade Macy's stock to outperform with a price target of $27.

Video Transcript

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JULIE HYMAN: Brian Sozzi, of course, as always has thoughts on retailers, and on Macy's in particular. But today he's going to cede the mic to an analyst who has a note out on Macy's and is upgrading the stock. What's-- what's the rationale here?

BRIAN SOZZI: Yeah, one of my favorite analysts actually Oliver Chen over at-- over at Cowan here-- before you even get into this analysis interesting at the top of Oliver's report he gives Macy's an ESG score-- and shout out to our producer Pam for even bringing this to my attention because I would have glossed over it. It's the first time I've seen a stock analyst put an ESG score right inside of their report. Which is very interesting. I have to dig more into what-- how the score is measured.

Giving Macy's ultimately though a 56 out of 100 and I don't think it takes a rocket science to decode that that's not exactly a great score. And it reflects really the sources of apparel and where it, in fact, comes from. But I'm going to take more back into that a little bit later on.

But on this upgrade here, really boils down to several things and we're seeing Macy's stock really not react on it. Nonetheless, I understand where Oliver is coming from here. Calling out agile inventory at Macy's and what that basically means inventory continues to be at low levels for Macy's compared to their sales. They do not want any write downs really after a year of writing a lot of stuff down during the pandemic. So they want to keep inventories low, keep it within the top selling items and hopefully drive some sales.

Also to Oliver noting pricing management. And what that essentially means is Macy's has been able to successfully push through price increases on the products it is selling in large part because they see there is demand out there. Consumers are in fact restocking their closets. Macy's can push through some of the price increases.

Oliver also noting story at reimagination. He sees Macy's ultimately going to 500 stores for about 640 stores currently And a lot of those stores, once Macy's hits that-- you know they've already closed hundreds of stores the past three years or so. But ultimately when they get to that 500 store mark, about 85% of those stores will be in A or B malls. What that means those are some of the best malls in America here. So Macy's will be not necessarily operating really those junky looking Macy's stores and many C or D malls, so those will be closed. Some big top malls Macy's will be in.

And then last but not least, they're also out here Macy's aggressively cutting debt. Keep in mind Macy's had to lever up during the pandemic just to survive. And so by all tokens there probably should be under $3 billion in total debt on their balance sheet by 2023 or a little before then. So that is certainly good here. That will reduce their interest expense, hopefully improve their profits.

And last but not least, we saw the stock gap up significantly when Macy's reporting earnings a couple of weeks ago. They reinstated their dividend. They're out there buying back stock. So all in all, Julie I understand Oliver Chen's upgrade. On paper it makes sense. But here's my take, you look at these Macy's stores the traffic is still absolutely abysmal and this is something Oliver acknowledged in his report. Store traffic is pretty darn weak in Macy's stores. So there were lying a lot on converting those human beings that do come to stores to drive their sales.

Secondarily, and you can see me in a Macy's shopping bag right there. Yeah. Our team never amaze-- never ceases to amaze me, Julie. Can you trust management? I have heard the-- I've heard Macy's on the comeback trail pretty much for about seven years and they never seem to live up to expectations here. And I think right now management is promising a whole heck of a lot to the street and they really need to deliver they need to deliver. They need to deliver on back to school. It has started well. Can they continue that momentum into the holidays? To be determined.

And, you know, just keep it real here old retailer. Macy's is an old retailer in a fast changing digitally driven world. And I still view a lot of their stores, Julie, as a big problem to have. Its real estate. It's cost. You have people essentially consumers buying things on secondhand resale sites. The world of retail is changing and I'm still unclear how Macy's is going to play into that.

JULIE HYMAN: Sozzi on the show, obviously. That's how though-- that's the hot new product according to our producer Nick Monty. Move over elf on the shelf, Sozzi on shelf-- on the shelf coming to a Macy's near you.