Macy's Turns In a Boring Fourth Quarter

It was a good morning for department store chain Macy's (NYSE: M  ) . The company announced earnings this morning, handily beating the Street's EPS expectations of $1.99 with earnings of $2.05 per share. While Macy's actually brought in less on the bottom line, with income falling 2% to $730 million, it made up for it on a per-share basis due to its ongoing share repurchasing program. Revenue also beat estimates, coming in at $9.35 billion for the quarter. The company saw weak comparable-sale increases in the fourth quarter, with in-store sales rising about 0.6%, but online sales jumped 47%, pushing up the total comparable-store sale increase to 3.9%.

Macy's has clearly turned a corner recently and is hoping for a 2013 bounce. The stock pushed hard at the beginning of 2012 but then fell into a rut through most of the second half of the year. Now 2013 seems to be starting strong, with Macy's reporting good earnings today and turning in an 11.7% increase in comparable-store sales in January.

But it's not all roses and china serving platters featuring roses. Online sales continue to support weak in-store sales, and the company is currently entering a legal circus with J. C. Penney (NYSE: JCP  ) and Martha Stewart Living (NYSE: MSO  ) . Macy's needs to get out of the courtroom and into its stores if it wants to do something different and make headway in 2013. Here's what investors should be on the lookout for over the next few months.

Sales push
The first thing Macy's needs to do is get its in-store sales primed for success. While the company has been riding its redesigned online and mobile sites, it still needs to figure out how to get customers through the door. In its January sales release, Macy's cheered its strong growth, but it needs to do more work if it wants to be as integrated as competitors like Nordstrom (NYSE: JWN  ) .

Nordstrom averages 100,000 visits to its mobile site every day, and in 2012 mobile sales accounted for 20% of total direct sales. The company has said it will continue to focus on mobile to help in-store sales, as well. It has a plan to personalize its online experience on all platforms so that customers get a specific experience in different locations and on different devices. That's a real omnichannel vision for sales, and it's exactly what Macy's is lacking.

The legal slog
Macy's other immediate challenge is to figure out what to do with Martha Stewart, regardless of how the current litigation shakes out. There seem to be three possible outcomes. First, Macy's could win its fight, and the "store in a store" concept could be deemed a part of JCPenney locations. That would mean that Macy's would be the only place to go for Martha Stewart, but the two companies would carry on with an awkward relationship -- after all, the J. C. Penney deal is valued at more than $275 million for Martha Stewart.

The second outcome would allow JCPenney stores to host the Martha Stewart stores while allowing Macy's to go on selling Stewart wares as well. That wouldn't be great news for Macy's, but it would have the benefit of allowing Macy's to continue selling Martha Stewart products. It also would mean relatively little in terms of legal time and cost. That's a lot better than the third outcome, in which Martha Stewart shows  that Macy's broke their contract by not promoting the Martha Stewart line well enough. Then JCPenney stores would be the only place to find Stewart products, and Macy's would be held liable for some losses.

The future
I think the most likely outcome is the second scenario, where both companies can offer Martha Stewart products and neither is shown to have broken the contract. That outcome should help Macy's hit the 3.5% comparable-sales growth it has forecast for 2013. I imagine at least 3 percentage points of that growth will come from the online channel, unless Macy's can make a stronger in-store push. Without that push, 2013 looks like it will be another flat year for Macy's.

J. C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but people are beginning to doubt that CEO Ron Johnson can work the same magic he did at Apple. Investors wondering whether J. C. Penney is a buy today are invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof -- and as a bonus, you'll receive a full year of expert guidance and updates as key news develops. Simply click here now for instant access.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 26, 2013, at 6:18 PM, sandyclaws99 wrote:

    Do you do any research before you post an article?

    Are you aware that months ago Judge Oing granted Macy's a temporary injunction against JCP selling the same type of goods sold at Macy's? His reasoning was that Macy's would likely prevail if the case went to trial.

    Martha Stewart will learn that a contract is a contract just as insider information is insider information.

  • Report this Comment On February 27, 2013, at 9:34 AM, TMFRedRam wrote:

    Thanks for reading.

    I usually just make up story-lines and publicly traded company names and then jam them all together.

    Oing granted a limited injunction that allows both companies to sell MSO products, though JCP isn't supposed to offer certain types of products. The injunction against JCP was actually seen as a win for JCP, not M.

    Oing heard two injunctions, one against MSO which he said M was likely to win, and one against JCP which he did not say M was likely to win.

    Here's a quote: "It's one thing to enjoin MSLO because that company is the centerpiece of these actions," [Oing] said. "It's another thing to enjoin a retail company from doing business. We live in a free-market society."

    Cheers, Andrew

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