Is Macy’s Stock Fashionable Again?

Macy’s (NYSE:M) has emerged from the ashes of the financial crisis as the clear leader in big name retail. With strong brand equity and a revitalized operational strategy, Macy’s, unlike its competitors, has figured out how to capitalize on renewed consumer confidence. Macy’s share price—currently trading at around $48.50—is up 41 percent in the past year. Can it maintain its lead in the highly competitive retail industry? Let’s use our CHEAT SHEET investing framework to decide whether Macy’s is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

Macy’s substantial investment in its technological infrastructure seems to be paying off as it has added at least $1 billion to its top line in each of the past three years. The company has increased its IT spending in order to reduce inventory costs. For example, Macy’s can now optimize its inventory distribution so that an online order will be filled at the store least likely to sell through its supply. It has also focused on strengthening its omnichannel retail strategy: integration of physical store shopping and online and mobile shopping. Macy’s CEO Terry Lundgren says that Macy’s is focusing on developing its business with the millennial generation. Macy’s strong investment in its omnichannel retail strategy has struck a cord with millennials who enjoy the flexibility of being able to shop online or in a physical store.

After a huge restructuring program back in 2009, Macy’s eliminated around 4 percent of its personnel, cut its dividend by more than half, and changed its operational structure. While the news was not popular with investors initially, it now appears to be paying off. From this restructuring effort came My Macy’s. The organization changed from seven operating divisions operating 50 to 100 stores in multiple states to one centralized ‘control center’ and 69 divisions operating 10 stores within close proximity of one another. First off, this initiative greatly increases economies of scale for Macy’s by establishing one central hub. Secondly, divisions can now tailor its product offerings to suit local preferences. The new operational structure gives Macy’s a distinct competitive advantage over its competitors—at least until they can replicate it. So far, the results have been overwhelmingly positive.

E = Earnings and Revenues Are Increasing

Macy’s showed that its recovery is for real as it announced impressive first quarter earnings in May. Same-store sales, arguably the most important metric in retail, rose 3.8 percent for the quarter, and its first quarter profit jumped 20 percent. As you can see from the chart below, both earnings per share and revenue have been increasing at an overwhelmingly positive rate.

2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1
EPS YoY Growth 27.91% 4.29% 12.50% 21.84% 43.33%
Revenue YoY Growth 3.97% 7.18% 3.79% 3.01% 4.31%

E = Exceptional Performance Relative to Peers

Macy’s recent success is related to its competitors’ consistent struggles since the financial crisis. The following table shows some key financial ratios from Macy’s and its chief competitors: J.C. Penney (NYSE:JCP), Saks (NYSE:SKS), Dillard’s (NYSE:DDS), and Kohl’s (NYSE:KSS).

From the table, we can see that Macy’s and Dillard’s are the frontrunners of the group. Macy’s, Dillard’s and Kohl’s all have comparable forward price to earnings multiples, while J.C. Penney does not have a P/E after posting an earnings loss and Saks’ is much higher at 26.27. Macy’s also has an attractive FY2013 growth estimate at 14.2%, second only to that of Dillard’s. Additionally, Macy’s has the second highest forward dividend yield at 2.1%.

M JCP SKS DDS KSS
Forward P/E 10.82 N/A 26.27 10.13 10.84
Growth Est. (2013) 14.20% 11.10% -10.90% 17.90% 4.80%
Dividend Yield 2.1% N/A N/A 0.2% 2.8%

Conclusion

Macy’s is a market leader in the retail industry. With its My Macy’s business model starting to flourish, expect the retailer to hold on to its competitive advantage even as laggards like J.C. Penney and Kohl’s get back in the fold. Additionally, Macy’s is well positioned in the millennial market with its strong omnichannel retail strategy. Macy’s forward price to equity multiple suggests that it is actually relatively cheap compared to the rest of the retail industry. The company just announced increases in its dividend and share buyback program to boot. Look for Macy’s to continue to OUTPERFORM.

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