Which Retailers Have Positive Momentum Heading Into the Second Half of 2014?

The first three months of 2014 were tough on the retail sector, but Macy’s, J.C. Penney, and Urban Outfitters are showing signs that a sales recovery is under way.

May 28, 2014 at 2:10PM

The retail sector had a miserable winter season with bad weather conditions negatively impacting sales at many stores and forcing some stores to even close temporarily. The spring/summer season is expected to turn things around, and companies like Macy's (NYSE:M), J.C. Penney (NYSE:JCP), and Urban Outfitters (NASDAQ:URBN) showed signs of improvement in their fiscal 2014 first-quarter earnings releases.

Both Macy's and J.C. Penney reported-better-than expected results. Macy's reported earnings per share that were $0.01 higher than expected, and J.C. Penney reported a lower loss per share than expected of -$1.14 versus the anticipated loss of -$1.25. While Urban Outfitters did miss its profit per share estimate of $0.27 by a penny, revenue of $686.3 million was higher than the market's first-quarter revenue estimate of $680.2 million.

Macy's rewards investors with a hefty dividend increase
Macy's first-quarter sales for fiscal 2014 decreased 1.7% to $6.28 billion, and comp-store sales fell 1.6%. Net income for the 13 weeks ended on May 3 was $224 million, an increase of 3.2% over the same period last year. Diluted EPS rose 9% to $0.60 from $0.55 reported in the first quarter of 2013.

While top-line results weren't very impressive, the company showed confidence in its ongoing strategies and reaffirmed its full-year guidance disclosed in January. Macy's board also believes the company will finish the year on a high note and authorized a dividend increase of 25%. The higher dividend of $31.25 per share will be paid on July 1.

There was also an increase to the dollar amount of shares that can be repurchased by $1.5 billion, bringing the total share-repurchase authorization to $2.5 billion. So, depending on what happens in the next few quarters, investors may see share-buyback activity, which will help to boost the share price. By the end of fiscal 2014, Macy's expects sales growth of 2.5% to 3% and forecast diluted EPS of between $4.40 and $4.50.

J.C. Penney's CEO switch attributed to better results
J.C. Penney reported improving same-store sales and gross margin for the first quarter of 2014. Same-store sales were up 6.2%, and net sales grew to $2.8 billion from $2.64 billion reported in the first quarter of 2013. The gross margin was 33.1%, up from 30.8% in the same period last year and improving by 230 basis points. With Mike Ullman at the helm, who was replaced and has returned to the company as CEO, the retailer's marketing strategy was altered and more promotions were added to attract Penney's principal target market: middle-income consumers.

Despite the improvements, Penney's debt levels are high, with total debt at $5.6 billion, and are a cause for concern if sales are weak over the next few quarters. In order to beef up cash, the company entered into a credit facility with several banks worth $2.35 billion. The company is expected to finish 2014 with $2 billion in cash. Penney's shares closed up about 16% after the earnings release; however, a downgrade from Well Fargo to underperform from market perform has put downward pressure on the stock, and it currently trades for around $9.

Urban Outfitters has higher costs amid higher revenue
While Penney has increasing debt levels, Urban Outfitters has rising expenses; and sales at its namesake brand are lagging. The company's five brands -- Anthropologie, Bhldn, Free People, Terrain, and Urban Outfitters -- posted combined net sales of $686 million, up 6% from the same period last year. Comp- store sales were highest at Free People, up 25%, and Anthropologie, up 8%, while Urban Outfitters dragged down results with a decrease of 12%. Higher marketing expenses, which increased e-commerce traffic, were the main reason for the company's 8% rise in selling, general, and administrative expenses.

The gross margin dropped to 34.8% from 36.8%, mostly due to new store expenses and the comp-store sales decline at Urban Outfitters. The company's namesake has suffered through some marketing hiccups lately, such as complaints from customers on T-shirts sold with questionable messages. Urban has also made fashion choices that have failed to resonate with customers. It also doesn't help that fast-fashion retailers, like H&M and Forever 21, have done a better job at wooing the teen and young-adult demographic. Through May 19, Urban's shares have fallen about 19% in the past 12 months.

My Foolish conclusion
An improving job market will be key for these companies to report results in the next two quarters that show they are on more solid footing. J.C. Penney and Macy's are the best positioned to perform well as the calendar moves closer to the school and holiday gift-giving seasons. Penney's debt levels should be monitored, especially if sales don't show an uptrend in the next few quarters. Urban Outfitters' internal issues may need additional attention before revenue and shares move considerably higher.

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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