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 (UNKNOWN:MSO.DL). 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.
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.
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.
Fool contributor Andrew Marder 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.