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It's time for investors to go long shares of Macy's because classic brands and retailers have finally innovated their way into the digital era, according to Evercore ISI.
Analyst Omar Saad, who double-upgraded his rating on shares of the iconic department store to long from short, says Wall Street's fears about a "retailpocalypse" stemming from Amazon's ascent are overblown.
"In a nutshell, we are convinced that old-world brands and retailers are figuring out how to manage inventory and market to consumers in the digital era, a critical turning point for the sector," Saad said in a note Sunday. "Macy's and others will have equal opportunity in the coming years to compete for the attention of discretionary consumers given a core set of competitive advantages that are not going away."
"Multi-year share price underperformance and still modest valuations despite a very healthy consumer macro environment tell us that the market is still married to the sensational 'retailpocalypse' narrative which assumes that Amazon and other digital disruptors will continue unabated," he added. That's "a viewpoint with which we no longer agree."
Access to better brands, low-to-no-cost prime real estate that could serve double duty as local distribution centers for e-commerce order, and a household name franchise all spell upside for the company, Saad added.
The analyst raised his 2018 earnings per share estimate to $3.15 from $2.95 and his 2019 estimate to $3.40 from $3.10.
Shares of Macy's rose 4.3 percent Monday following Saad's bullish note, adding to a 47 percent climb so far this year.
Macy's said it acquired New York-based concept shop Story earlier this month in one of its latest attempts to develop brands that resonate with customers. The add-on has worked with brands like Jet.com and Dressbarn to curate rotating shopping experiences, with themes ranging from "well being" to "made in America."
The department store also rolled out a pop-up marketplace earlier this year to select locations, designed to bring Macy's closer to young brands looking to grow as well as provide the company with ways to offset unprofitable square footage.
These types of initiatives, Saad argued, are key to an ongoing evolution in softline retailers across the country.
"A centralized pool of inventory will enable Macy's to service the same (if not more) demand with less inventory, an incredibly healthy dynamic. In recent years, Macy's has been implementing processes to improve inventory flow and management," he wrote. "These efforts are just starting to pay off, with inventory continuing to decline over the past year while retail gross margins held relatively steady and finally inflected to positive in the first quarter of 2018."