Macy's has been on fire lately. In the past six months alone, the company’s stock price has rocketed 62.5%, reaching $21.56 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Macy's, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Macy's Will Underperform?

We’re glad investors have benefited from the price increase, but we don't have much confidence in Macy's. Here are three reasons there are better opportunities than M and a stock we'd rather own.

1. Stores Are Closing, a Headwind for Revenue

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Macy's listed 685 locations in the latest quarter and has generally closed its stores over the last two years, averaging 2.7% annual declines.

When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.

2. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.

Macy’s demand has been shrinking over the last two years as its same-store sales have averaged 1.6% annual declines.

3. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Macy's, its EPS declined by 22.4% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

Final Judgment

Macy's doesn’t pass our quality test. Following the recent surge, the stock trades at 9.9× forward P/E (or $21.56 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better stocks to buy right now. We’d suggest looking at one of our top digital advertising picks.

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