Macy's (M 0.10%) shares dropped in Tuesday morning trading after the company reported fourth-quarter earnings. Sales of $9.36 billion were just short of estimates at $9.39 billion, though adjusted earnings per share of $2.44 topped expectations of $2.42. By 12:15 p.m., shares were down about 3.5% from the previous close.
After turning in its sixth consecutive year of EPS growth, guidance for the coming year was also modest as management expect per-share earnings growth of 7%-9%, to $4.70-$4.80, below the consensus at $4.84, which would end that streak. For fiscal 2014, the company reported adjusted EPS of $4.40. CEO Terry Lundgren promised 2015 would be a transitional year, saying, "Having now reached such a healthy profitability rate, we are shifting our resources and energies to growing the top line faster while maintaining this high profitability rate level." Recently, Macy's announced it would close 14 stores and acquire the spa and beauty-products chain BlueMercury, giving it a foothold in a growing industry. Macy's operates about 825 stores under the names of Macy’s and Bloomingdale’s, as well as the macys.com and bloomingdales.com websites.
Though sales growth remains tepid, having improved just 1.8% in the fourth quarter and 0.6% for the year, with similarly slim increases in comparable sales, a combination of cost-cutting and share buybacks have made the stock one of the best performers in the S&P 500 since the recession, having gained over 200% in the last five years as earnings per share increased more than five times in that period.
As Lungren alluded to, there are several reasons to believe Macy's winning streak will continue. In addition to the BlueMercury acquisition and the store rationalization strategy, the company will continue to focus on its "M.O.M.," which is made up of three pillars: My Macy's localization, Omnichannel integration, and Magic Selling. During the age of e-commerce, the company was one of the first major retailers to seize the opportunity in omnichannel, and now ships online orders from most stores and offers online pick-up at all of its full-line locations.
That strategy has helped drive the company's increased profitability and continued relevance as other retailers are threatened by online operators such as Amazon.com.
Macy's should also benefit from developments outside its control. Lundgren noted that the company is among best-in-class retailers for EBITDA margin, though many of its rivals are struggling. J.C. Penney and Sears in particular have seen sales dwindle and losses pile up since the recession. Macy's took advantage of J.C. Penney's swoon under Ron Johnson, and stands to benefit from any further sales slide from its competitors. Sears is facing a growing threat of bankruptcy, which could give Macy's a sales bump.
American consumers also have more disposable income today than they have at any point since the recession as gas prices and the unemployment rate have tumbled in the past year. That extra income should benefit a diversified broad-line retailer like Macy's.
Finally, the company's share buyback program delivered the bulk of the company's earnings growth in the last year, as share count decreased 7.2% last year, and should continue to do so this year as the company has $1 billion left in its current buyback authorization. By investing in itself to maintain modest sales growth and reposition for the future, and returning cash to shareholders through dividends and buybacks, Macy's management seems to have struck the right balance to maximize shareholder returns. At a P/E of less than 15, the stock is still cheap enough, to warrant further buybacks as Macy's stock is still cheaper than many of its rivals, including Kohl's, Nordstrom, and Target.
Even with slower projected growth than expected this year, Macy's still looks like a solid bet to continue outperforming.
