Macy's Growth Relies On Both Old And New

10/8/2012


Macy's growth relies on both old and new

  Recent Price
$39
  Dividend
$0.80
  Yield
2.1%
  P/E Ratio
12
  Shares (millions)
417
  Long-Term Debt as % of Capital
53%
  52-Week Price Range
$42.17 - $24.38

Macy's ($39; M) enjoys plenty of operating momentum. Heading into September, the retailer had increased same-store sales for 33 straight months, and its monthly growth has exceeded the average for department stores tracked by Thomson Reuters in 19 of the past 20 months. September sales were due Oct. 4, after this issue went to press. For the six months ended July, Macy's per-share profits climbed 29%, while sales rose 4% and cash provided by operations increased 9%.

The retailer eschews growth shortcuts that tempt many peers:

Excessive promotions: Gross profit margins have held up fairly well in the past year, and operating profit margins are steadily increasing.

Aggressive expansion: With about 840 department stores under the Macy's and Bloomingdale's brands and an additional 10 Bloomingdale's outlet stores, the retailer's store count has shrunk over the past year.

Growth in the southern states and demand for watches, handbags, cosmetics, and home furnishings has helped drive results in recent months. More importantly, online sales have soared 35% year-to-date. Despite that growth, the stock trades at 12 times trailing earnings, 12% below its three-year average and 18% below the median for department stores in the S&P 1500 Index. Macy's is a Focus List Buy and a Long-Term Buy.

Looking to new sales channels

Macy's uses what it calls an omnichannel strategy, intended to let customers shop seamlessly in stores, online, and through mobile devices. In addition to Macy's fulfillment centers, about 290 stores can handle online orders (up from roughly 20 stores in July 2011). Sales staff direct customers to order out-of-stock products for home delivery, reducing one of the key risks of keeping store inventories lean.

As Macy's online business grows, costs associated with free shipping could pressure gross profit margins. But Macy's network of stores also helps keep shipping costs low.

In fiscal 2012, feminine accessories, shoes, and cosmetics accounted for 37% of sales, followed by feminine apparel (25%), apparel for men and children (23%), and home/miscellaneous (15%). Private-label brands generated 20% of sales last year. Looking ahead, a new partnership with The Finish Line ($23; FINL) could boost shoe sales.

Conclusion

Management expects the second half of fiscal 2013 to resemble the first, when same-store sales climbed 3.7%. Operating results figure to improve in the January quarter (the consensus calls for 20% higher per-share profits) after a weak October quarter (profits projected to decline 13%). Lower credit-card profits and a higher tax rate will weigh on October-quarter earnings, while sales in the January quarter should benefit from two extra days between Thanksgiving and Christmas.

Stock repurchases shaved 4% from the share count in the past year, and management expects further buybacks in coming quarters. Macy's doubled its quarterly dividend to $0.20 per share in January and now yields 2.1%. 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
Jul '12
0.67
vs.
0.55
+ 3%
40.80
-
32.31
14 - 11
Apr '12
0.43
vs.
0.30
+ 4%
42.17
-
35.01
15 - 12
Jan '12
1.71
vs.
1.55
+ 6%
38.34
-
30.42
14 - 11
Oct '11
0.32
vs.
0.08
+ 4%
32.67
-
24.20
13 - 10
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
26.41
2.88
0.30
35.92
-
21.69
12 - 8
2011
25.00
2.03
0.20
26.32
-
15.34
13 - 8
2010
23.49
1.41
0.28
20.84
-
6.27
15 - 4
2009
24.89
1.29
0.53
28.47
-
5.01
22 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
91
74
81
72
40
93
52

   * Earnings exclude special items. Note: Core earnings exclude stock compensation expenses and noncash expenses and gain connected to convertible debt.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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