No Rain On Macy's Growth Parade

2/13/2012


  Recent Price
$36
  Dividend
$0.80
  Yield
2.2%
  P/E Ratio
13
  Shares (millions)
432
  Long-Term Debts as % of Capital
51%
  52-Week Price Range
$36.37 - $22.50

In January, Macy's ($36; M) same-store sales rose 2.4%, marking its 26th straight month of growth. The gain fell short of the consensus, but the shares rallied after management raised its January-quarter profit guidance for the second time in 30 days.

Macy's now expects earnings per share of $1.63 to $1.65, implying 3% to 4% growth. For the three months ended January, total sales rose nearly 6% to $8.72 billion on same-store-sales growth of 5.2%. Macy's, which on Feb. 21 will report profits for the quarter and year ended January, is rated a Buy and a Long-Term Buy.

Business background

Macy's operates about 850 stores under the Macy's and Bloomingdale's brands.  In the last two years, the retailer has gained market share without substantially boosting its store count. Sales have increased between 4% and 7% in eight consecutive quarters, with operating profit margins steadily widening even as free shipping for many online orders has driven the cost of sales higher.

In the nine months ended October, cash provided by operations jumped 81% to $627 million, while free cash flow doubled to $162 million. In the year ahead, management has hinted that it will devote more cash to share repurchases and dividend growth, while continuing to trim debt.

The company is investing to create a seamless experience for customers shopping in stores, online, or using mobile devices. Macy's has enjoyed substantial success on the Web, with online sales growing 40% in both the January quarter and the fiscal year ended January. In the year ahead, Macy's also plans to add more Bloomingdale's Outlet stores, a chain launched in 2010. 

Feminine accessories accounted for 36% of revenue in the year ended January 2011, followed by feminine apparel (26%), men's and children's products (23%), and home furnishings (15%). The retailer sells a variety of brands, as well as private-label products. No single supplier accounted for more than 5% of net purchases in the year ended January 2011.

Macy's could feel a squeeze from J.C. Penney's ($42; JCP) plan to overhaul its pricing strategy, scrapping its perpetual sales and focusing instead on marking products with regular, presumably lower, prices. But J.C. Penney said that it will take about four years to remodel its stores, giving Macy's the opportunity to grab more market share as its rival repositions.

Conclusion

The department-store industry is mature, and it has undergone a wave of consolidation. In the wake of those moves, remaining players have more clout with vendors.

For the fiscal year ending January 2013, the consensus calls for per-share profits of $3.26, implying 15% growth. Shares trade at 11 times year-ahead estimated earnings. At 13 times trailing earnings, Macy's also trades at a 14% discount to its five-year average price/earnings ratio. Even if the trailing P/E fails to expand and only holds at current levels, Macy's shares stand to rise 18% over the next year if the company meets the consensus profit target. An annual report for Macy's Inc. is available at 7 W. 7th St., Cincinnati, Ohio 45202; (513) 579-7000; www.macysinc.com.

MACY'S
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Oct '11
0.32
vs.
0.08
+ 4%
32.35
-
22.66
13 - 9
Jul '11
0.55
vs.
0.35
+ 7%
30.62
-
23.98
13 - 11
Apr '11
0.30
vs.
0.05
+ 6%
25.99
-
21.69
13 - 11
Jan '11
1.55
vs.
1.40
+ 5%
26.32
-
22.78
14 - 12
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend ‡
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
25.00
2.03
0.35
26.32
-
15.34
13 - 8
2010
23.49
1.41
0.20
20.84
-
6.27
15 - 4
2009
24.89
1.29
0.20
28.47
-
5.07
22 - 4
2008
26.31
2.18
0.53
46.70
-
20.94
21 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
86
61
79
52
40
91
82

   * Earnings exclude special items.
   ‡ Special dividend in 2008. Dish pays no regular dividend.
   † Quadrix® scores are percentile ranks, with 100 the best.


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