We're Still Sold On Macy's Future

5/26/2014


  Recent Price
$57
  Dividend
$1.25
  Yield
2.2%
  P/E Ratio
14
  Shares (millions)
373
  Long-Term Debt as % of Capital
52%
  52-Week Price Range
$61.26 - $42.18

Macy's ($57; M) shares have slumped 2.2% since the department-store chain declared April-quarter results that featured a 1.6% decline in same-store sales, disappointing analysts, who expected an increase. That's the empty portion of the glass.

However, we see Macy's glass as a lot closer to full. The stock is rated Buy and Long-Term Buy.

Reasons to buy

Per-share profits rose 9% in the quarter, slightly topping the consensus despite weaker-than-expected sales. The bottom-line strength stems from several trends that justify optimism about year-ahead results:

• Gross profit margins rose slightly, reflecting tight control on costs for acquiring and distributing inventory, while the consensus called for a decline. Macy's projects flat to slightly lower gross margins for the year, a target that could prove conservative. 

• Selling, general, & administrative expenses (operating costs) dipped to 27.8% of sales from 28.0% a year earlier, the third consecutive quarter with a year-over-year decline and fifth in the last six.

• Macy's has become stockholder-friendly, investing heavily in its own shares, buying back enough to reduce the share count nearly 6% over the last year and 13% over the last three. Given the company's buyback authorization of about $2.5 billion — 60% of it announced this month — we expect continued aggressive repurchases.

With rivals Sears Holdings ($36; SHLD) and J.C. Penney ($9; JCP) reeling, Macy's should continue picking up market share, a trend capable of supporting growth in the year ahead and for the long haul.

By now, you're probably tired of hearing companies blame their troubles on the weather. So are we. But while Macy's cited weather as one of the culprits for its poor revenue showing in the April quarter, the company also said trends improved in April as the weather warmed. Macy's reiterated expectations for full-year growth of 2.5% to 3% in same-store sales.

In its conference call May 14, Macy's said that by two weeks into the July quarter, year-to-date sales were already up from the year-earlier period — an impressive turnaround considering sales fell nearly 2% in the April quarter. The warm-weather recovery implies plenty of pent-up demand. The market expects per-share-profit growth of 12% in the year ending January 2015 and 13% in fiscal 2016, with sales up 2% to 3% in both years.

Conclusion

While Macy's shares are up 6% so far this year, the average retail stock in the S&P 1500 Index has declined more than 7%. Despite its superior performance, Macy's still trades at 14 times trailing earnings, 24% below the median retailer.

Earlier this month, the company raised its quarterly dividend 25%, following on the heels of a 25% boost last year and 100% hikes in 2011 and 2012. Macy's yield of 2.2% is roughly double the average for S&P 1500 retailers, yet the new dividend represents less than one-third of trailing earnings. The company said it plans to continue raising the dividend.

An annual report for Macy's Inc. is available at 7 W. 7th St., Cincinnati, OH 45202, (513) 579-7000, www.macys.com.

MACY'S
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Apr '14
0.60
vs.
0.55
-2%
61.26
-
50.05
15 - 12
Jan '14
2.31
vs.
2.05
-2%
56.65
-
45.56
15 - 12
Oct '13
0.47
vs.
0.36
3%
49.72
-
42.18
14 - 11
Jul '13
0.72
vs.
0.67
-1%
50.77
-
44.33
14 - 12
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
27.93
4.00
0.95
56.65
-
38.52
14 - 10
2013
27.69
3.46
0.80
42.17
-
32.31
12 - 9
2012
26.41
2.88
0.35
35.92
-
21.69
12 - 8
2011
25.00
2.11
0.20
26.32
-
15.34
12 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
93
56
84
93
49
51
75

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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