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Will Macy's Keep Up the Good Work?

By Zahid Waheed - Mar 14, 2014 at 7:00AM

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Do strong earnings coupled with a solid outlook suggest that Macy's is a valuable buy?

Macy's ( M -2.25% ) once again posted strong results, as its latest quarter marked the 16th consecutive quarter of earnings-per-share growth. While Macy's performance looked solid, Dillard's ( DDS 0.35% )( DDS 0.35% ) and J.C. Penney ( JCPN.Q ) had average quarterly performances. Let's analyze Macy's and see where it's heading before examining its industry peers.

Fourth-quarter results
In the fourth quarter, Macy's reported per-share earnings of $2.31, which grew 11% from last year's comparable quarter. Earnings surpassed Wall Street expectations by $0.14. Total revenue fell 1.6% to $9.2 billion, as the company shut 244 stores amid severe winter weather in the US. However, favorable weather conditions in the southern US led to better sales in that region. 

Same-store sales grew by 2.3%. The gross margin remained flat at 40.6%, while the operating margin slipped by 2 basis points to 14.7%. Selling, general, and administrative expenses dipped by 7 basis points to 25%.

The women's apparel segment witnessed solid growth, driven by private brands. In comparison to Macy's stores, Bloomingdale's stores performed relatively better. Overall, inventory at the company's stores increased by 4.7% because of weak sales in January. 

For fiscal 2013, Macy's earnings stood at $4 per share, up from $3.46 a share in the previous fiscal year. Sales ticked up by 0.8% to $27.9 billion, while comps rose 2.8%. 

What is Macy's up to?
Macy's attributes strong quarterly earnings to its core business strategies -- My Macy's localization, omnichannel integration, and magic selling, collectively known as M.O.M.

The My Macy's initiative, which began about three years ago, has been successful. It focuses on offering merchandise relevant to customers' local demands and tastes. The omnichannel strategy focuses on maximizing sales by integrating all available shopping channels. In order to continually grow sales through omnichannel initiatives, Macy's is investing heavily in its fulfillment centers. At the moment, it has 292 stores taking part in the fulfillment of orders. By year-end, the company expects to have 500 such stores; this will reduce the company's delivery time even more.

Magic selling focuses on training associates so that that they are able to engage more with customers, helping them to make decisions. This initiative ensures that the company's customer service becomes more caring and responsive.

Macy's knows the importance of e-commerce, which is why it's constantly investing in the online segment. The company recently rolled out its e-commerce service, allowing customers to buy items online and pick them from stores.

During the last month, Macy's announced that it will be laying off 2,500 workers (which is part of its new cost-cutting plan); but its total employee count will remain the same, as the company plans to hire new people for its emerging online business.

In fiscal 2014, Macy's expects same-store sales to grow between 2.5% and 3%. Margins are expected to remain flat, while earnings before interest and taxes are expected to grow slightly in comparison to last year.

During the year, the company will benefit from tax credits; for this reason, its 2014 effective tax rate is projected to be around 36.4%. Having a frozen pension plan means that the company can turn its pension expenses into income; management forecasts around $150 million in lower expenses as a result. 

The earnings guidance for the full year stands at $4.40 to $4.50 per share. The retailer believes that its unique organizational structure, skilled talent, and financial resources will keep it ahead of competitors.

Industry peers
Upscale department-store chain Dillard's is constantly closing its underperforming stores in order to reduce operating costs. In the recent quarter, the company fell short of analysts' expectations and reported per-share earnings of $2.71; last year's earnings were $3.36 per share. Total revenue also slipped from $2.15 billion to slightly less than $2.1 billion, while comps grew by 2%. As sales declined, Dillard's was left with higher inventory levels. Due to this, the company offered huge discounts on items, which lead to lower revenue.

J.C. Penney recently posted revenue of $3.78 billion, which missed analysts' estimate of $3.85 billion; revenue in the year-ago quarter was nearly $3.9 billion. The company's loss per share shrunk to $0.68 in comparison to the previous year's loss of $0.88 per share. Same-store sales increased by 2%.

The company didn't do well under the previous CEO, as his rebranding strategy didn't pay off. However, this quarterly performance shows that the company is slowly but surely getting back on track.

Final thoughts
Macy's had an admirable fourth quarter; earnings along with comps looked solid, as the company continued to grow. Had the weather conditions remained solid, the company would have posted even better results. The retailer's M.O.M initiative, new cost-cutting plan, and focus on e-commerce will keep on boosting its profits in the coming quarters as well.

Moreover, the company has provided a strong outlook for this year, which makes it one of the top retailers in the industry. Considering all of this, Macy's appears to be a judicious investment choice at this point in time.

  
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q
Macy's, Inc. Stock Quote
Macy's, Inc.
M
$27.86 (-2.25%) $0.64
Dillard's, Inc. Stock Quote
Dillard's, Inc.
DDS
$274.85 (0.35%) $0.95

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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