Macy's (NYSE: M) Catches Its First Upgrade Since Before COVID-19

It’s been a while since Macy’s (NYSE: M) was up there, but an 8.5% jump in Monday’s session was enough to make them one of the best performing equities on the day. Shares of the 162-year-old department store are now up more than 90% in the past eight weeks and about to lock in two of their best months in years. There’ll undoubtedly be plenty of skeptical bears who’ll call this little more than a dead cat bounce, but there’s also an argument that Macy’s elevator is about to take off from the basement floor.

In the days leading up to Christmas, Jefferies were out with an upgrade to Macy’s shares, moving them from Hold to Buy. After what can only be called an annus horribilis for brick and mortar focused retail, it was a much welcomed new voice in the bull’s corner and should do a lot in keeping Q4’s momentum rolling into 2021.

Consumer Spending Expected To Increase

As COVID vaccines start to be rolled out and economies continue to recover, Jefferies’ expectation is that consumer spending will pop hard in the coming twelve months. They’re also expecting in-store shopping to bounce back and to at least eat into the lead that e-commerce has opened up on it this year.

On top of that, there’s the potential for partnership opportunities that could catapult the New York City based name back into growth. In a note to clients, Jeffries said "we believe forcing rotation from mature, low growth brands into a more growth-focused portfolio is a necessary catalyst and as a blue-sky scenario, Macy's becomes a desirable partner for hyper growth direct-to-consumer brands seeking to roll-out immersive boutique experiences."

This fresh optimism for traditional retail names is a trend that’s been gathering pace for some time now. JPMorgan upgraded GAP (NYSE: GPS) last month, and in tandem with Macy’s upgrade this month, Jefferies also upgraded Kohl’s (NYSE: KSS). Investors would have seen the recovery potential starting to grow in Macy’s earnings report through this year too. Their Q1 report in July had revenue down 45% on the year, at the trough of the COVID pandemic’s effect on retail. By September’s Q2 report, revenue was only down 36% on the year while in their Q3 report in November, revenue was only down 22% year on year.

Attractive Risk/Reward Profile

Still, no matter how big the recovery potential is for next year and how well Macy’s go about capitalizing on that, there’s a long road ahead before they’re anything like the quality name they once were. It’s worth noting that shares are trading at the same levels they were at for much of the first half of the 1990s. On that point and from a technical perspective, they’ve found solid support in the $5-6 range which is where they bottomed out in 1992 and 2008. Both times shares went on to log three and four digit percentage rallies which makes the current risk/reward profile pretty attractive for any investor willing to take on a bit of risk.

The worst seems to be behind us and Macy’s can boast of a solid level of momentum that it’s carrying into the new year. Even with the recent pop shares are still more than a 50% rally away from their pre-COVID levels. Don’t be surprised if a few more upgrades from Wall Street in the coming weeks help them along their way.