Macy’s M) shares have slipped as much as 8% after the department-store giant reported Q2 results on Thursday morning, despite beating expectations and raising its full-year outlook.
The post-earnings pullback may be worth a closer look for income investors, particularly as Macy’s turnaround gains traction and its roughly 3.5% dividend yield appears increasingly well supported by improving cash generation and a healthier balance sheet.
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Macy’s Q2 Results Strengthen the Turnaround Narrative
Macy’s delivered one of its better quarters in recent years, with net sales rising 1% year over year to $4.87 billion and edging estimates of $4.82 billion. Reported adjusted EPS reached $0.63, up from $0.35 a year ago, but management disclosed that the quarter included a $0.23-per-share net benefit from tariff refunds.
Excluding that benefit, Q2 adjusted EPS was $0.40, representing a much more modest 14% year-over-year increase and still topping expectations of $0.37 per share by 8%. Notably, Macy’s has now surpassed earnings expectations for seven consecutive quarters and has exceeded sales estimates for six straight quarters.
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Furthermore, companywide comparable sales increased 2.7%, marking the fifth consecutive quarter of positive comps. Adjusted EBITDA also climbed to $457 million from $373 million, with the adjusted EBITDA margin improving to 9% from 7.5%.
Importantly, the results suggest Macy’s “Bold New Chapter” turnaround strategy is gaining traction rather than relying solely on cost cuts. Comparable sales at its Reimagine 200 Macy’s locations rose 1.9%, while Bloomingdale’s surged 11.3% to its highest second-quarter sales volume ever, and Bluemercury comps increased 6.2%.
Management subsequently raised its fiscal 2026 outlook, now calling for net sales of $21.68-$21.83 billion and adjusted EPS of $2.15-$2.35, compared with its previous EPS forecast of $2.00-$2.20.
Macy’s Dividend Looks Increasingly Sustainable
For income investors, Macy’s improving cash position may be just as important as its earnings recovery. The company generated $586 million of operating cash flow during the first half of the year, more than double the $255 million generated during the comparable period last year.
After $324 million of combined property, equipment, and capitalized software spending and $35 million of asset-sale proceeds, Macy’s produced roughly $297 million of cash flow after capital expenditures, comfortably covering the $101 million it paid in dividends.
Macy’s recently declared another quarterly dividend of $0.1915 per share, equating to about $0.77 annually. Furthermore, the annual payout represents only about 34% of the midpoint of Macy’s updated $2.15-$2.35 adjusted EPS guidance, leaving a reasonable cushion if retail conditions soften.
The balance sheet provides additional support. Macy’s finished Q2 with $1.3 billion in cash, up sharply from $829 million a year ago, against $2.4 billion of total debt. Perhaps more importantly, the company has no material long-term debt maturities until 2030, limiting near-term refinancing pressure.
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Macy’s Appealing Valuation
Despite the turnaround progress, Macy’s valuation remains modest. At recent levels, Macy’s stock trades at around 9X forward earnings and less than 1X forward sales, with its price-to-free-cash-flow multiple also remaining low.
That valuation already leaves considerable skepticism baked into the shares and could provide an attractive entry point if Macy’s sustains positive comparable-sales growth and improved profitability.
Of course, Macy’s remains exposed to discretionary consumer spending, tariffs, and the structural challenges facing traditional department stores, meaning its dividend is not without risk. Still, improving sales trends, stronger cash generation, and ample liquidity make the payout look considerably better supported.
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Bottom Line
The post-earnings dip in Macy’s stock may offer an appealing opportunity for income-oriented investors willing to tolerate the volatility of the retail sector. Reassuringly, Macy’s turnaround is producing tangible improvements across its brands, cash flow is comfortably covering the dividend, and its balance sheet provides additional financial flexibility.
At the moment, Macy’s stock currently sports a Zacks Rank #2 (Buy) and an overall “A” VGM Zacks Style Scores grade for the combination of Value, Growth, and Momentum.
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This article originally published on Zacks Investment Research (zacks.com).
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