Executive Summary / Key Takeaways

• Macy's, Inc. is demonstrating a compelling turnaround, with its "Bold New Chapter" strategy yielding tangible results, notably its strongest comparable sales growth in 12 quarters in Q2 2025. This resurgence is driven by strategic investments in customer experience, product curation, and operational efficiencies across its multi-nameplate portfolio.
• The company's luxury brands, Bloomingdale's and Bluemercury, are consistently outperforming, achieving their fourth and eighteenth consecutive quarters of comparable sales growth, respectively, and gaining market share in a disrupted luxury landscape.
• Operational modernization, including significant technology investments like the China Grove distribution facility and the exploration of AI/machine learning, is streamlining processes, improving supply chain efficiency, and enhancing the omnichannel customer experience, contributing to cost savings and improved service.
• Despite external headwinds, particularly increased tariffs impacting gross margin by an estimated 40 to 60 basis points for FY 2025, Macy's maintains a disciplined financial approach, reducing debt, generating strong operating cash flow, and resuming share repurchases, signaling confidence in its long-term profitable growth trajectory.
• The company's revised full-year 2025 guidance reflects cautious optimism, balancing recent performance beats with an anticipated "choiceful consumer" and ongoing tariff pressures, while continuing to reinvest savings into growth initiatives.

A Bold New Chapter Unfolds in American Retail

Macy's, Inc. (NYSE:M), a venerable name in American retail since its founding in 1830, is actively redefining its place in a dynamic industry. Operating through its iconic Macy's, Bloomingdale's, and Bluemercury nameplates, the company has embarked on a "Bold New Chapter" strategy, a three-year plan initiated in fiscal 2024, designed to pivot towards sustainable profitable growth. This strategy is fundamentally customer-led, prioritizing an enhanced omnichannel shopping experience and a strategic reallocation of capital from underperforming Macy's stores to its more promising "go-forward" businesses.

The company's history provides crucial context for its current transformation. Originally Federated Department Stores, Inc., the company rebranded to Macy's, Inc. in 2007. A significant strategic alliance was forged in 2005 with Citibank (C) for its credit card operations, a partnership that continues to be a vital revenue stream. More recently, in fiscal 2024, Macy's transitioned its inventory valuation method to the LIFO cost method, aiming for greater cost accuracy and transparency, aligning with broader industry practices. This foundational shift underscores a commitment to modernizing core business functions.

The retail landscape is currently characterized by a "choiceful consumer" who, while resilient, remains sensitive to economic pressures and inflation. In this environment, Macy's multi-brand, multi-category, and multi-channel model provides a distinct competitive advantage. The company's portfolio spans from off-price offerings through Macy's Backstage to luxury experiences at Bloomingdale's and Bluemercury, allowing it to cater to a broad demographic and adapt to varying consumer demands. This diversification provides sourcing optionality and economies of scale in negotiations, distinguishing Macy's from more narrowly focused competitors.

Macy's competitive positioning is a blend of heritage and strategic adaptation. Against mass-market retailers like Walmart (NYSE:WMT) and Target (NYSE:TGT), Macy's differentiates through its curated brand assortments and a more elevated shopping experience, particularly within its luxury segments. While Walmart and Target excel in cost leadership and everyday essentials, Macy's aims to capture market share through quality and service. Compared to department store peers like Kohl's (NYSE:KSS) and Nordstrom (NYSE:JWN), Macy's offers a broader spectrum of price points and a larger physical footprint, which, when optimized, can translate into significant market presence. Macy's current P/E ratio of 9.74 is notably lower than Nordstrom's 13.79 and Walmart's 38.26, and comparable to Kohl's 9.30, suggesting potential undervaluation if its turnaround gains further traction.

A critical differentiator for Macy's is its investment in technological innovation and operational modernization. The company is actively exploring practical applications of artificial intelligence (AI) and machine-based learning to drive efficiencies. A significant project is the 1.4 million square foot China Grove distribution facility, slated to open mid-2025. This state-of-the-art facility is designed to leverage automation, streamlining inventory fulfillment and management across all nameplates, ultimately creating greater supply chain efficiencies at a lower cost. Furthermore, Macy's has improved its digital platform, enhancing site navigation, search engine optimization, and implementing a more competitive pricing algorithm. These technological advancements are not merely incremental; they are foundational to Macy's competitive moat, contributing to improved customer experience, faster delivery times, and optimized inventory management, all of which are crucial for long-term growth and margin expansion.

Performance Validation: A Resilient Turnaround Takes Shape

The "Bold New Chapter" strategy is beginning to bear fruit, as evidenced by Macy's recent financial performance. For the second quarter ended August 2, 2025, Macy's, Inc. reported net sales of $4.812 billion, a 2.5% decrease from the prior year, primarily due to the closure of 64 non-go-forward locations in fiscal 2024. Total revenue for the quarter was $4.999 billion, down 1.9% year-over-year. Despite the sales decline from store closures, the company achieved its strongest comparable sales growth in 12 quarters, with a 1.9% increase on an owned-plus-licensed-plus-marketplace (OLM) basis. The "go-forward" business comparable sales, which exclude closed stores, rose an even more impressive 2.2% on an OLM basis.

Profitability metrics also showed encouraging signs. Adjusted diluted earnings per share (EPS) for Q2 2025 was $0.41, significantly exceeding the company's guidance range of $0.15 to $0.20. Core adjusted EBITDA, excluding asset sale gains, reached $377 million, or 7.5% of total revenue, surpassing guidance. While the gross margin rate declined by 80 basis points to 39.7% in Q2 2025, primarily due to proactive markdowns on early Spring assortments and the impact of 145% China tariffs, it was still slightly better than expectations. Selling, general and administrative (SGA) expenses decreased by $29 million, or 1.5%, reflecting benefits from store closures and ongoing cost containment efforts, partially offset by strategic investments in growth initiatives.

The company's liquidity and capital allocation strategy remain robust. As of August 2, 2025, Macy's held $829 million in cash and cash equivalents. Year-to-date operating cash flow for the 26 weeks ended August 2, 2025, significantly improved to $255 million, up from $137 million in the prior year, driven by decreased working capital requirements and lower cash taxes. Capital expenditures were managed judiciously, totaling $343 million year-to-date, a reduction from $432 million in the prior year, with a focus on digital and omnichannel capabilities.

Macy's also demonstrated a commitment to shareholder returns and balance sheet health. In the first half of 2025, the company returned $251 million to shareholders through $100 million in dividends and $151 million in share repurchases. A notable financing transaction in July 2025 saw Macy's Retail Holdings, LLC issue $500 million in 7.38% senior notes due 2033, utilizing the proceeds to fund a tender offer and redeem other outstanding debt. This resulted in a net long-term debt reduction of approximately $340 million and extended material debt maturities until 2030. The company's Amended Extended ABL Credit Facility was also reduced to $2.1 billion and extended to April 2030, further fortifying its liquidity profile.

Strategic Initiatives Driving Growth

Macy's "Bold New Chapter" is built upon three interconnected pillars, each contributing to the company's resurgence.

Strengthening and Reimaginining the Macy's Nameplate

The core Macy's brand is undergoing a significant transformation. The "Reimagined 125 locations," which expanded from the initial "First 50" stores in early 2025, are proving to be a key growth driver. These locations continued to outperform the broader Macy's fleet in Q2 2025, with comparable sales increasing by 1.4% on an OLM basis. Customers are responding positively to elevated merchandise, more effective staffing, and localized events, leading to stronger traffic, average order value, and a record-high second-quarter net promoter score for the Macy's brand.

The company's assortment evolution is gaining traction, attracting new brand partners such as Abercrombie Kids (ANF), and expanding distribution of existing labels like Sam Edelman (CAL), Hugo Boss (BOSS), and Good American. These additions complement established popular brands like Coach (TPR), Donna Karan (GIII), Levi's (LEVI), and Ralph Lauren (RL). Macy's off-price concept, Backstage, and its digital Marketplace are also strong contributors, filling "white space" in assortments and catering to customers seeking diverse price points and brands.

Accelerating Luxury Growth

Macy's luxury portfolio, comprising Bloomingdale's and Bluemercury, is a consistent engine of growth. Bloomingdale's achieved its fourth consecutive quarter of comparable sales growth in Q2 2025, with an impressive 5.7% increase on an OLM basis, marking its highest second-quarter sales and net promoter score on record. This performance was fueled by strong demand in ready-to-wear, fine jewelry, fragrance, and tabletop categories. Bloomingdale's differentiated positioning in the aspirational to luxury market, coupled with exclusive partnerships and special capsule collections, continues to attract new customers and vendor partners, enabling it to gain market share.

Bluemercury, the luxury beauty concept, extended its remarkable streak to 18 consecutive quarters of comparable sales growth, with a 1.2% increase in Q2 2025. This consistent performance is driven by strength in dermatological skincare and successful brand launches, including Byredo, Victoria Beckham Beauty, and Charlotte Tilbury. Bluemercury's curated assortments and "agnostic selling" approach are highlighted as strong differentiators in the competitive beauty market.

Simplifying and Modernizing End-to-End Operations

Underpinning the customer-facing initiatives is a concerted effort to streamline and modernize Macy's end-to-end operations. The company is focused on finding efficiencies through automation, resource optimization, and process streamlining. This includes exploring applications of artificial intelligence and machine-based learning to enhance operational and financial performance. These efforts are crucial for enabling Macy's to invest in its growth ambitions while simultaneously simplifying its business model and improving returns for shareholders.

Outlook and the Road Ahead

Macy's revised full-year 2025 guidance reflects a prudent approach, balancing encouraging recent performance with a fluid macro environment. The company anticipates net sales of approximately $21.15 billion to $21.45 billion. Comparable sales are projected to be down approximately 1.5% to down 0.5%, with Macy's Inc. "go-forward" comparable sales expected to be down roughly 1.5% to flat.

A significant factor in the revised outlook is the increased impact of tariffs. The full-year guidance now incorporates a 40 to 60 basis point tariff impact to gross margin, up from a prior expectation of 20 to 40 basis points. This translates to an estimated $0.25 to $0.40 impact on EPS, with the majority of this incremental pressure expected to flow through in the fourth quarter due to the timing of receipts. Management is actively working to mitigate these tariffs through shared cost negotiations, vendor discounts, and strategically adjusting prices.

Despite these headwinds, the company's profitability outlook remains focused on improvement. Gross margin as a percentage of net sales is expected to be roughly 60 to 100 basis points below the prior year, reflecting the tariff impact and proactive inventory management. SG&A expenses are projected to be down low single digits on a dollar basis, demonstrating continued cost containment efforts. Adjusted EBITDA as a percentage of total revenue is guided to be between 7.4% and 7.9%, with core adjusted EBITDA between 7.0% and 7.5%. The adjusted EPS guidance for the full year is $1.70 to $2.05, which does not include potential future share buybacks.

For the third quarter of 2025, Macy's expects net sales of approximately $4.5 billion to $4.6 billion, with comparable sales ranging from down 1.5% to up 0.5%. Core adjusted EBITDA as a percentage of total revenue is projected between 3.3% and 3.7%, and adjusted EPS is anticipated to be a loss of $0.20 to $0.15, including approximately $20 million in asset sale gains.

Risks and Competitive Headwinds

While Macy's demonstrates clear progress, several risks warrant investor attention. The increased tariff impact, particularly from the Trump Administration's February 2025 tariffs on products from over 90 countries including China, poses a direct threat to gross margins and profitability. The uncertainty surrounding the amount, timing, and consumer acceptance of price increases to offset these tariffs remains a key concern.

The broader economic environment, characterized by a "choiceful consumer" and potential for a heightened promotional landscape, could impact discretionary spending. Macy's reliance on physical stores, despite its omnichannel push, exposes it to shifts in consumer shopping behavior and economic downturns. While the company is closing underperforming locations, the pace and impact of these closures on overall sales and profitability need continuous monitoring.

In the competitive arena, Macy's faces challenges from both agile digital-native retailers and large-scale discount operators. While its luxury brands are gaining market share, the core Macy's brand must continue to differentiate itself through experience and curated assortments to fend off intense competition. The company's mitigation strategies for supply chain disruptions and geopolitical risks, though actively pursued, may not always be effective or timely.

Conclusion

Macy's, Inc. is in the midst of a significant transformation, with its "Bold New Chapter" strategy showing encouraging signs of success. The company's ability to drive comparable sales growth in its "go-forward" businesses, particularly within the "Reimagined 125" Macy's locations and its luxury nameplates, validates its customer-centric approach and strategic investments. Operational modernization, underpinned by technological advancements in supply chain and digital platforms, is enhancing efficiency and improving the customer experience.

Despite facing headwinds from increased tariffs and a cautious consumer environment, Macy's maintains a disciplined financial strategy, actively managing its balance sheet, reducing debt, and returning capital to shareholders. The company's multi-brand, multi-category model provides a resilient framework to adapt to market dynamics and capitalize on competitive disruptions. For discerning investors, Macy's represents a compelling turnaround story, where strategic execution, technological leadership, and a focused approach to its core strengths are positioning the company for sustainable, profitable growth in the evolving retail landscape.