1 Stock to Get on Your Watchlist for March

Macy's (NYSE: M  ) is an old retailer. Sure, it was established in the 1800s. But lately it has been logging banner results that come straight out of the 21st century. And yet, for whatever reasons, Wall Street doesn't seem too interested in the department store.

I think that's a mistake. Macy's is poised to keep up the outperformance, and here's why.

Latest results
Macy's managed a strong fourth quarter despite the tough consumer environment. Comparable sales were up by 3.7%, while full-year adjusted profits ended up 20%. Macy's saw total revenue grow by over $1 billion in 2012, and it generated enough cash to repurchase shares and double its dividend.

What's even more impressive, though, is how the company's tech strategies have succeeded in boosting Macy's retailing reach. Here are three key ways that the department store has been building out its tech advantage.

Internet sales: Macy's reported a 48% jump in online sales last quarter, and a 41% rise for the full year. By comparison, eBay (NASDAQ: EBAY  ) grew its online marketplace orders by 11% last year. And Amazon.com (NASDAQ: AMZN  ) , in what counts for a monster quarter for the e-tailing giant, increased net sales by 27%.

Sure, Macy's is growing from a much smaller base than these two retailers. But the company is beating multi-channel sellers, too. Best Buy was only able to manage a 10% increase in online shopping over the holiday selling season. Macy's is doing something right here, and it's not just about growing from a small base.

Fulfillment: Maybe it's about better delivery services. As part of its all-channel sales strategy, Macy's has been busy upgrading stores so that they can double as distribution centers for online orders. Thanks to that investment the retailer can now fill online orders from 300 of its locations, up from just 23 stores last year. Amazon, meanwhile, only has around 40 fulfillment centers spread across the U.S., although it has been increasing that tally lately. Again, Amazon handles a ton more volume through those warehouses. But Macy's fulfillment build-out is progressing so well that the company can entertain the idea of a same-day delivery service to further boost sales.

And making efficient use of the existing store infrastructure is one factor that's helping boost Macy's earnings. After bottoming out well below peers in 2009, the company's EBITDA margin is back up to near 14%, within striking distance of Kohl's (NYSE: KSS  ) and Nordstrom (NYSE: JWN  ) .

M EBITDA Margin TTM Chart

M EBITDA Margin TTM data by YCharts.

Mobile: Shopping through mobile devices like smartphones and tablets is a big trend in retailing right now. Macy's is taking full advantage of the customer stampede onto those devices. The company had an app ready to go for Black Friday that helped customers navigate to specials in real time within their local stores. It was part of Macy's big push for younger shoppers. Continuing that strategy, the company aims to have 13 new millennial brands introduced by the end of this year, while expanding on 11 existing brands. CFO Karen Hoguet says those launches set up a "very important source of growth" for this year and next.

Risks
Still, even the best selling strategies won't save a retailer from a weak product line. For example, Macy's did well moving handbags, watches, and shoes last quarter, but came up short in the housewares and junior's departments. The company will have to keep improving on its localized fashion offerings, or it risks falling behind on fast-moving consumer trends.

Also, the company holds about $7 billion in long-term debt. While that's a hefty burden, Macy's has been making progress at paying it down. The company lowered its total debt level by $800 million last year. And I think what remains is manageable considering that the company booked $2.3 billion in operating cash flow last year.

Bottom line
But is it cheap? Macy's shares are trading at about 9 times forward earnings. That's less than the forward P/E of 10 for Kohl's and 13 for Nordstrom. Of course, the price looks even better compared to the online retailers that Macy's has been besting by some metrics lately. Amazon trades at 73 times expected earnings, and eBay at 17. And the company sports something else that they don't: a dividend currently yielding 2%. Overall, I think Macy's is a good value, and it should beat rivals -- and the market -- from here. 

More stocks to watch
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.


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