Top Retail Pick – Macy’s (M) a Buy?

Posted by on Sep 03, 2010 | 1 comment

—Earnings expected to post next Friday

Macy’s Inc. (NYSE: M) reported total sales of $1.64 billion for the month of August, up 6.2% from total sales of $1.54 billion for the equivalent period last year. Same-store sales were also up 4.3% in August.

“Our back-to-school business through August has been strong, led by great performances by Material Girl, the exclusive juniors brand by Madonna, as well as American Rag, our largest private brand in juniors and young mens,” stated Macy’s CEO, chairman and president, Terry J. Lundgren.

Not bad compared with the average of all retailers. Total retail sales at stores open at least one year rose 3.5% compared with a year earlier, according to Retail Metrics. Two-thirds of the nation’s retailers surpassed expectations, with Macy’s being one of them.

To backtrack a bit, Macy’s previously reported second-quarter earnings that bested expectations of $0.29 per share on an increase of 7% year-over-year sales and a 5.2% increase in same-store sales. The retailer cited a jump in online sales for Macy’s and Bloomingdales merchandise for the better-than-expected increase in the top and bottom line.

Last year, Macy’s posted $0.20 per share earnings for the second quarter. Operating margin increased to 5.2% from 3% for last year’s equivalent quarter.

“The improvement in our business is not the result of a single factor. Rather, our performance reflects a number of strategic initiatives that are working successfully and complementing each other,” said Lundgren.

The company’s performance under the most difficult period since the Great Depression has been remarkable, actually, better than a lot of its peers. Management has cut operating income (pairing 7,000 employees in 2009) while maintaining lofty gross margins each quarter, leaving the rest of the income statement to top-line growth strategies that, for the most part, must unfortunately be left to the economy gods.

However, the most troubling item for Macy’s—besides the overall state of the U.S. economy—is its level of long-term debt, which is approximately as much as its market cap of more than $8 billion.

Too much debt can be a killer of any company’s bottom line in a slow growth economy. But thanks to the Fed’s low interest rates policy Macy’s will have the opportunity to rollover this debt at much lower rates over time. This, of course, is the expectation of the Fed’s strategy, not only for corporations saddled with high debt loads, but for the U.S. Treasury market as well.

It appears the marginally leaner Macy’s could manage to eke out a profit if the U.S. economy does avert another period of negative GDP, the double-dip that’s been talked about endlessly. Job growth will be everything to Macy’s and other retailers for that matter, despite the theory that somehow suppressing 70% of the U.S. economy (consumer spending) will have no effect on growth. This metric will continue to be key to Macy’s profitability along with all retailers outside the “dollar store” space.

A bet on Macy’s is a bet on a bona fide U.S. recovery—though the recovery will be at a much slower pace then previous post-WWII recoveries, say economists.

By taking a gamble of Macy’s, you will be among some pretty good company. Professional money is all over this stock, as in 95% of total outstanding shares owned by money managers such as BlackRock, Dodge & Cox, State Street, Fidelity and a host of other big names.

Macy’s is expected to report fiscal third-quarter results on Friday, September10. Analysts expect $0.029 per share.

Thomson Reuters analysts estimate that Macy’s full-year earnings will reach $1.87.

As of the close of trading Thursday, Macy’s Put/Call ratio stands at 3.89, a rather large lopsided bet (or hedge) on a decline in Macy’s stock price.

  • Scott Brady

    M’s got great management. I think the bad economy might keep them down to meager earnings.

Copyright Beacon Equity @ 2012