Is the Market Mispricing Macy's Compared With Other Retail Stocks?

Year to date, shares in department store retailer Macy's (NYSE: M) have performed strongly, surging by nearly one-third. Compare this to the performance of the S&P 500 index, which is up by around 15% over the same time frame.

However, while Macy's has outperformed, it continues to trade at a discount to its closest public peers. There is a strong rationale behind this, but at the same time, this could work to your advantage.

Why? With the stock still undervalued, shares may have considerable room to run, especially over the next few years.

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Why Macy's remains at a discounted valuation

At current prices, the famed department store retailer trades for around 12.5 times forward earnings. For comparison, Kohl's Corporation (NYSE: KSS) trades for more than 20 times forward earnings, and Dillard's (NYSE: DDS) trades for nearly 34 times forward earnings.

Yes, to some extent, this is an apples-to-oranges comparison. After all, investors expect both of the competitors to experience an earnings rebound in the coming fiscal year ending January 2027.

Still, even adjusting for this, Macy's still appears very undervalued. Sell-side analysts estimate Kohl's will report earnings per share (EPS) of $1.23 in 2027. Dillard's earnings the year after next could come in at $27.92 per share.

Forecasts for Macy's call for earnings of $2.21 per share in 2027. Hence, Kohl's currently trades for around 17.5 times its estimated 2027 earnings, Dillard's trades for 22.5 times its estimated 2027 earnings, but Macy's trades for just 10.1 times its estimated 2027 earnings.

How this may work to your advantage

Yes, there's a substantive reason behind Wall Street's discounting of Macy's. In December, when the company last released quarterly earnings, it also provided guidance for Q4 FY2026, which covers the holiday shopping season.

While revenue guidance of $7.35 billion to $7.5 billion came in slightly ahead of analyst forecasts, which called for $7.3 billion in sales, EPS guidance of $1.35 to $1.55 fell below forecasts, which called for EPS of $1.58.

While not certain, Wall Street may be expecting even worse results when Macy's reports them in February. However, despite slackening consumer demand, who's to say this means poor results during the holiday quarter?

As middle-to-upper income consumers, Macy's bread-and-butter customers have been weathering the recent macroeconomic storm much better than their middle-class counterparts; the opposite may take shape. That is, Macy's could post holiday season results that are better than feared, while Kohl's and Dillard's fall short of expectations.

The bottom line

Better-than-expected or unexpectedly positive results could propel Macy's shares to higher prices a few months from now. As seen from the current valuation gap, there is much room for valuation expansion.

On a longer time frame, other factors may have a significant impact on this retailer's stock price. Namely, the company's ongoing "Bold New Chapter" turnaround plan, which has entailed closing underperforming stores, as well as improving the customer experience and merchandise mix.

Trading in the low $20s per share recently, Macy's stock has in the past traded at prices north of $30. If current trends continue, this past high-water mark may arrive sooner than you think.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.