Macy's Just Had Its Strongest Q1 in 4 Years. Here Are 3 Ways the Struggling Retailer Is Tackling Its Turnaround.

Malls and department stores are seen by many as fading relics of the past, but don't tell that to Macy's (NYSE: M).

The clothing retail store chain just had its best first quarter in years, and its stock price is up 85% over the past 12 months. It even caught the attention of Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB), which added its first-ever stake in Macy's in the first quarter.

Revenue increased 2% in the quarter to $4.9 billion, while its comparable (or same-store) sales rose 3%. Macy's store comp sales were up 1.6%, but the company's Bloomingdale stores saw comp sales surge 10.2% while its beauty property, Blue Mercury, saw same-store sales jump 6.4%.

Net income rose 66% to $63 million while earnings per share increased 77% to $0.23 per share.

Image source: Getty Images.

The retailer has now had two straight quarters of earnings growth after declining earnings for much of the previous three years. Here are three reasons why Macy's stock is headed in the right direction.

1. A bold new chapter

Much of the improvement stems from its Bold New Chapter initiative, launched two years ago. It focused on cutting costs by reducing the number of underperforming stores and focusing on a core group of 350 stores. That meant closing roughly 150 locations.

At the same time, the plan called for opening new locations of its luxury brands, Bloomingdale's and Blue Mercury, as both have been in high demand. We watched that play out in Q1 as these two brands saw comp sales surge.

The target was low single-digit sales growth, expenses rising by less than 2% to 3%, mid-single digit adjusted annual EBITDA growth, and free cash flow back to pre-pandemic levels. Macy's is hitting its sales and expense targets, and still progressing toward EBITDA and free-cash flow targets.

2. Reimagined stores

As part of the Bold New Chapter strategy, Macy's plans to reimagine 200 stores to improve the customer experience. Initially, the company planned to open 125 reimagined stores, but it has been so successful that management upped the number to 200.

The 200 reimagined Macy's locations posted comparable sales increases of 2.4%, higher than the 1.6% comp sales increase for Macy's overall in Q1.

The first quarter's success led Macy's to raise sales and earnings guidance for this fiscal year. The chain now expects $21.5 to $21.75 billion in net sales, up from the previous guidance of $21.4 to $21.65 billion. Further, comp sales are slated to increase 0.5% to 1.5% this fiscal year, up from the previous range of -0.5% to 0.5%.

In addition, adjusted earnings are targeted at $2.00 to $2.20 per share, up from a range of $1.90 to $2.10 per share.

3. A cheap stock price

The turnaround plan caught the attention of Berkshire Hathaway, and I'm certain Macy's low valuation was a major reason why Berkshire Hathaway opened a new position.

Macy's stock is trading at 9 times earnings and 10 times forward earnings, making it dirt cheap. Further, the price-to-sales ratio is just 0.27, so Macy's stock is extremely attractive from a valuation standpoint.

As an added bonus, Macy's stock offers a strong dividend yielding 3.45%.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.