Warren Buffett’s Berkshire Just Made a Major Bet on an Undervalued Retail Stock

Warren Buffett built his reputation by looking for businesses that the market may be undervaluing. Berkshire Hathaway's latest portfolio moves suggest the company still sees opportunities to apply that philosophy in an unlikely corner of the market: department stores.

Berkshire more than doubled its investment in Macy's (NYSE:M) during the second quarter, taking its position to approximately 7.3 million shares worth $173 million as of June 30. The sharp increase in Berkshire's Macy's stake could be worth examining for investors looking to start investing with a value-oriented approach.

Berkshire more than doubled its Macy's stake

The Macy's purchase stands out partly because of the speed at which Berkshire increased its exposure. Rather than simply maintaining the position it established during the first quarter, Berkshire more than doubled down during the following three months.

Still, investors shouldn't automatically assume Buffett personally selected the stock. Berkshire doesn't disclose which investment manager is responsible for every position, although Buffett remains chairman and continues to play a role in Berkshire's investment decisions alongside CEO Greg Abel. Buffett has publicly taken credit for some recent investments, including Berkshire's Alphabet position.

Macy's has the traits of a classic value stock

Macy's certainly isn't the type of high-growth stock currently commanding the market's biggest valuations. The company operates a mature retail business facing competition from online retailers, discount chains, specialty stores, and other department stores.

Those challenges have contributed to years of skepticism surrounding traditional department-store stocks, which is precisely where a value investor can sometimes find opportunities.

Macy's shares recently traded at roughly 10 times expected earnings, compared with a forward price-to-earnings ratio of about 15 for its department-store industry. Its price-to-book ratio has also been substantially below the industry average.

That doesn't automatically make Macy's undervalued. A low valuation can reflect legitimate concerns about a company's future, and traditional department stores have spent years battling changing shopping habits and intense competition from online retailers.

Berkshire has historically looked for situations where the price paid for a business appears attractive relative to its earnings power and long-term prospects. Macy's relatively modest valuation could leave room for upside if its turnaround succeeds.

Macy's is trying to turn around its business

Berkshire is also buying while Macy's attempts to improve its underlying business. The retailer's "Bold New Chapter" strategy involves closing underperforming locations, investing more heavily in its strongest stores, improving merchandise, growing its luxury businesses, and simplifying operations.

There are signs that those efforts are gaining traction. Macy's reported comparable sales growth of 1.5% for fiscal 2025, marking a return to annual comparable-sales growth. Its go-forward Macy's business posted positive comparable sales, while Bloomingdale's delivered 7.4% comparable-sales growth for the year.

Macy's fiscal performance

Macy's also finished fiscal 2025 with $1.2 billion in cash and equivalents and generated approximately $800 million in free cash flow. The company returned $448 million to shareholders through dividends and share repurchases.

None of those changes guarantees a successful turnaround. Department stores have spent years confronting changing shopping habits, and Macy's still needs to demonstrate that improvements can translate into sustainable sales and profit growth.

A cheap stock can stay cheap

Macy's valuation discount also reflects the possibility that its turnaround takes longer than expected or fails to produce meaningful earnings growth. Closing weaker stores can improve the quality of the remaining business, but it also reduces the company's overall sales base while Macy's continues investing in locations it intends to keep.

Recent results illustrate that trade-off. Fiscal 2025 comparable sales increased 1.5%, but fourth-quarter net sales still declined 1.7%, partly reflecting store closures. Growth also remains uneven across the portfolio: Bloomingdale's comparable sales rose much faster than those at the Macy's nameplate.

Should you follow Berkshire into Macy's?

Berkshire buying a stock can make it tempting to follow, particularly given Buffett's long record of finding companies the market has underestimated.

However, Berkshire's financial position is dramatically different from that of an ordinary investor. A $173 million investment sounds enormous, but it represents only about 0.05% of Berkshire's $323.8 billion U.S.-listed equity portfolio.

An individual putting 5% or 10% of a retirement portfolio into Macy's would therefore be making a much more concentrated bet than Berkshire has.

There is also no guarantee Berkshire will hold the shares for years. The company's reputation is built around long-term investing, but Berkshire regularly adjusts or completely exits smaller stock positions when its investment thesis changes.

Bottom line

Berkshire's decision to more than double its Macy's stake makes the retailer one of its more interesting recent purchases, particularly because the stock trades at a relatively low earnings valuation while management works through a multiyear turnaround.

Investors trying to get ahead financially can learn from the logic behind the move without treating it as a buy signal. Macy's may ultimately prove undervalued, but the key question is whether its turnaround can justify the risk.

This article is for informational purposes only and should not be considered investment advice.

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