Why the Leading Department Store Retailer Is Still a Buy

Even though it has been one of the best performing retailers over the last half decade, this stock is poised to move even higher.

May 31, 2014 at 11:31AM

Macy's (NYSE:M) has been one of the best investments in the retail space over the last few years. Its business caters to higher-end consumers, customers that are more resilient against economic downturns. As a result, shares of Macy's are up over 400% over the last five years. Meanwhile, the Dow Jones U.S. Retail Index is up just over 100%.

Macy's continues to impress. It recently posted first-quarter earnings results that showed good performance despite one of the toughest winters we have seen in years. The retailer saw comparable-store sales fall 1.6% in the first quarter. Compare that to other department retailer Kohl's (NYSE:KSS), which saw its comparable-store sales down 2% last quarter.

Macy's continues to excel
While Macy's recent quarter did not appear very great on the surface, the rest of the year could turn out to be quite impressive. Macy's believes that its full-year 2014 comparable-store sales will grow by 2.5% to 3% even though they were down in its fiscal first quarter.

Macy's has also developed an omni-channel strategy that is unrivaled by peers. Called M-o-M, the My Macy's, omni-channel, and magic-selling initiative allows customers to buy products in stores, on mobile devices, or computers. The key focus is on localizing stores. Macy's offers different products in different regions of the country because different areas have different tastes.

How the competition stacks up
One of Macy's top competitors is Nordstrom (NYSE:JWN). Earlier this month, Nordstrom posted first quarter earnings that beat the consensus by over 5%. This came as its revenue was up 7% year-over-year. Taking a page from the Target (NYSE:TGT) playbook, Nordstrom is slowing its expansion into Canada.

Target has had a rough time gaining traction in Canada. As a result, it ousted its CEO earlier this month. As for Nordstrom, it will not introduce its discount-brand Rack stores in Canada until 2017. It does plan to open six Nordstrom stores in the country by 2016. That is because it still believes that luxury retailers have an opportunity to excel in the market.

Kohl's appears to be at a bit of a disadvantage, as it competes more directly with some of the other retailers. This includes the discount retailer TJX, which owns TJ Maxx, and Ross Stores. Then there is J.C. Penney, which appears to be gaining strength and could regain market share at Kohl's expense.

There are a few things that Kohl's is working on to keep customers coming back to its stores. Most notably, it has rolled out a beauty section in a couple hundred stores. Kohl's also has a customer-loyalty program that it's trying out in a couple of states.

How shares stack up
Despite the steady rise of Macy's shares, Macy's still appears to be a worthwhile investment. The shares trade at a P/E ratio of 11.5 based on next year's earnings estimates. In addition, its P/E to growth, or PEG, ratio is a mere 1.1. The stock also has a 2.2% dividend yield. The company has a total of $2.5 billion available under its buyback program. That is good enough to reduce its shares outstanding by almost 12%.

Meanwhile, Nordstrom is trading at a forward P/E ratio of 16 and a PEG ratio of 1.7. Its dividend yield is lower than that of Macy's, which is at 1.9%. Kohl's appears to be a cheap stock, trading at a forward P/E of under 12, but its PEG ratio is 1.9. It does offer the highest dividend yield at 2.9%.

Bottom line
The department-store retail industry has been a mixed bag for investors. The best performers have been those that cater to high-end consumers and the low-price retailers that saw success as shoppers traded down. Higher-end retailers should continue to excel. For investors who look to gain some exposure to the improving department-store retail market, Macy's is worth a closer look. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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