Macy's (NYSE:M) is outperforming rivals like Kohl's (NYSE:KSS) and Dillard's (NYSE:DDS) by a considerable margin lately, yet the stock is valued in line with its peers. In terms of price versus quality, Macy's is looking like a buying opportunity for investors this holiday season.
Macy's has recently reported some surprisingly strong financial figures for the third quarter of 2013. Sales in the quarter totaled $6.276 billion, up 3.3 % from the third quarter of 2012. On a comparable-sales basis, Macy's third-quarter sales were up 3.5% versus 2012. Including sales from departments licensed to third parties, sales on a comparable basis were up 4.6% during the quarter.
In addition to growing sales, Macy's reported rising operating margins at 5.7% of sales during the quarter versus 5.4% in the third quarter of 2012. The company also reduced its average diluted share count from 407.9 million in the year-ago quarter to 380.2 million. Earnings per share increased by a whopping 31% to $0.47 per share during the quarter, comfortably above analysts' estimate of $0.39 per share.
This was the company's 15th consecutive quarter of improving earnings per share, so management is clearly executing as expected from a medium-term perspective.
CEO Terry J. Lundgren is feeling quite optimistic about the company's performance in the key holiday quarter:
Our business improved during the quarter, with particular strength in October, so we are entering the fourth quarter with confidence. We have curated an outstanding offering of the best gifts, fashion, value and service for our customers throughout the holiday season ... Our success in the fourth quarter will be driven by a wide selection of exclusive products from the most-wanted brands and designers.
Kohl's on, the other hand, reported third-quarter numbers that were quite disappointing: Total sales fell by 1% during the quarter as comparable-store sales dropped by 1.6% versus the same quarter in the previous year. Net income declined by 18% from $215 million to $177 million in the third quarter of 2013.
Kohl's invested $562 million in share repurchases during the nine-month period ending on Nov. 2, 2013, so diluted shares outstanding fell to 218 million from 235 million in the year-ago quarter. This buffered the decline in earnings per share, but earnings for the quarter still dropped by 11% to $0.81 per share from $0.91 per share in the third quarter of 2013.
For the coming quarter, management expects earnings per share to be between $1.59 and $1.74, total sales are expected to decline in the range of 2% to 4%, and comparable-store sales are forecast to be between flat and a 2% decrease. Kohl's also reduced its earnings-per-share guidance for the full year from $4.15-$4.35 to $4.08-$4.23.
All in all, Kohl's numbers were quite dismal, especially when compared against the robust figures reported by Macy's.
Dillard's is doing much better than Kohl's, but not as well as Macy's. The company reported better-than-expected earnings-per-share figures for the third quarter thanks to a combination of moderately rising comparable-store sales, healthy margins, and big share buybacks.
Revenues increased by 1.3% to $1.51 billion on the back of a 1% increase in same-store sales for the third quarter. Dillard's kept costs under control during the quarter, and implemented an aggressive stock buyback of $186.9 million, representing roughly 2.4 million shares at an average price of $77.8 per share. Diluted average shares outstanding were reduced by 6.3% versus the third quarter of 2012.
Adjusted for extraordinary items, earnings per share of $1.13 were 18% higher than during the third quarter of 2012. This was also 7.6% higher than the average analyst's estimate, so the numbers were generally well received by Wall Street.
Management seems to be executing reasonably well under challenging conditions, keeping costs under control and returning capital to shareholders via buybacks. That's much better than the decreasing sales and earnings numbers delivered by Kohl's, but not as good as the big increase in both total revenues and comparable-store sales reported by Macy's.
Comparing valuation ratios for Macy's versus Kohl's and Dillard's, the company is trading pretty much in line with its peers. While Macy's is a bit more expensive in terms of trailing P/E ratio, the difference is almost irrelevant when it comes to forward P/E. Kohl's has a higher dividend yield than Macy's, but Macy's beats Dillard's in the dividend department.
Considering Macy's superior financial performance and strong prospects for the holiday quarter, this average valuation may be signaling a convenient entry price in the company.
A superior alternative for an average price represents a buying opportunity -- that's valid whether you're shopping for holiday gifts or long-term investments. Macy's is outperforming its peers, but trading in line with them in terms of valuation. This holiday season, Macy's looks like the best place to go shopping for your portfolio.
Fool contributor Andrés Cardenal has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. 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.