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Believe It Or Not, Macy’s Huge Earnings Beat Bodes Well For J.C. Penney

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This morning, Macy's (NYSE: M  ) , the nearly $19 billion market capitalization retailer with sales 2012 sales of $27.69 billion, reported earnings that far surpassed analyst expectations, serving to push the company's stock price up around 9% in early morning trading. In an effort to understand what this means for Macy's, for Kohl's (NYSE: KSS  ) , as well as for their struggling rival, J.C. Penney Company (NYSE: JCP  ) , I decided to delve into the company's earnings release.

Earnings blowout!
For its most recent fiscal quarter, Macy's saw its sales rise by 3.3% from the $6.08 billion it reported in the third quarter of 2012 to the $6.28 billion it reported this quarter. According to the company, this sales increase came about primarily as a result of comparable-store sales increasing by 3.5%. On top of seeing an increase in comparable-store sales this quarter, the company has seen strong growth year-to-date, with sales rising by 2.2%. This, in turn, has helped push consolidated sales for the company up by 2.1% from $18.34 billion for the first three quarters of last year to $18.73 billion this year.

This isn't the only positive news that management had for investors. In addition to improving their top line results, the company has also successfully increased their bottom line considerably. For the quarter, net income rose by 22.1% from $145 million to $177 million. This, combined with the company's diluted shares outstanding declining by 6.8%, led the company to report a earnings per share of $0.47, a 30.6% increase over the same period a year ago and 20.5% higher than the $0.39 that analysts expected. The company's outperformance on an earnings per share basis means that it should be expected to report earnings per share for the year in the range of $3.80 to $3.90.

On top of revenue and net income rising, Macy's also reported a net profit margin increase, both for the quarter and year-to-date. Quarterly, the company clocked in a net profit margin of 2.8% compared to the roughly 2.4% it reported the same period a year ago, primarily attributable to selling, general, and administrative (SG&A) expenses declining from 34.2% of sales to 33.5%. However, it should be noted that the company's cost of goods sold rose a little, from 60.4% of sales last year to 60.8% this year. Year-to-date, Macy's net profit margin rose to 3.6% compared to the 3.3% it reported in the same three quarters of last year, primarily due to the same factors described above.

Finally, there is one more piece of good news to report about Macy's earnings release. Year-to-date, the company has increased their treasury shares by nearly $1.23 billion, up from the $1.02 billion they purchased over the same time horizon last year. What this means is that, in addition to having plenty of shares that they can sell back to the public, the company is confident in its future prospects enough to place a substantial amount of cash on the line.

What this means for and Kohl's
One important question that should arise is what this earnings release should mean for Kohl's.  With a market capitalization of $12.55 billion, Kohl's is a little smaller than Macy's, which means that it may face some difficulties replicating the margin results that Macy's showed this quarter.  It also puts pressure on the company to report attractive earnings tomorrow as investors may have become hopeful that it is catching up to its competitor. 

Over the past five years, Kohl's has seen its revenue rise by 17.6%, whereas Macy's has only risen by 11.2%, which suggests that the company is making up ground.  But, with net income falling last year as costs rose, the market is expecting Kohl's to post earnings per share that fall short of the same quarter a year ago due to fears that costs will continue to rise. 

What this means for J.C. Penney
It shouldn't be a surprise to the Foolish investor who has kept up with retail companies over the past year or so that J.C. Penney has been in significant disrepair. After seeing sales drop by 24.8%, from the $17.3 billion it reported at the end of its 2012 fiscal year to the $13 billion it brought in for its 2013 fiscal year, due to poor management decisions that disenfranchised their customer base, shares fell precipitously.

Although a competitor performing well may be a negative sign for a company like J.C. Penney, I think that it may actually be positive for two reasons.

First, such a significant increase in both sales and profitability for Macy's indicates that consumers are out shopping and they are likely doing so en masse. This point should serve to counter investor's concerns that consumers are scaling back spending and should, possibly, imply that consumer spending is on the rise. Although it remains to be seen if this is an industrywide trend, today's announcement by Macy's, combined with J.C. Penney's share prices rising nearly 2% today on no noteworthy news suggests that the market believes it is.

Second, the report by Macy's is evidence that the store-within-a-store concept is working. While comparable-store sales increased by 3.5% for the quarter for, this metric rose to 4.6% when you include store sales for departments that are considered a store-within-a-store. In truth, this is a significant sign that the concept works, which will likely help boost results at J.C. Penney as time moves on.

Foolish takeaway
Not only is Macy's growing and improving its margins, but it is also increasing the monetary value of its share buybacks. Additionally, it is highly likely that this news will prove to be a positive sign for J.C. Penney as it struggles to regain market share and move back toward profitability. For these reasons I think it may not be out of the question to consider jumping into the fray with a purchase of either of these entities if you are comfortable with the risks involved.

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Related Tickers

9/30/2016 2:42 PM
JCP $9.26 Up +0.01 +0.05%
J.C. Penney CAPS Rating: *
KSS $43.69 Up +0.89 +2.08%
Kohl's CAPS Rating: **
M $37.01 Up +0.96 +2.66%
Macy's CAPS Rating: **