A Retailer Becomes Great Again

03/30/2012 7:15 am EST

Focus: INCOME

Charles Carlson

Editor, DRIP Investor

The economic doldrums really took its toll on mid-level retailers, but the good ones have been through tough times before and know how to get back in the game fast, writes Charles Carlson of DRIP Investor.

It’s no secret that the Internet has changed the way people shop. And retailers who have not changed their ways and embraced the Internet have been under the gun.

One brick-and-mortar retailer that is doing nice business online is Macy’s (M). Indeed, online sales for this retailer were up nearly 39% in the month of January, 40% in the fiscal fourth quarter, and nearly 40% for fiscal 2012 ending in January.

Those strong gains are one reason the firm has been able to continue its streak of 26 consecutive months of year-over-year sales growth. The stock combines a decent yield of more than 2% with above-average appreciation potential, and is a buy at current prices.

Macy’s operates more than 800 department stores in 45 states, the District of Columbia, Guam, and Puerto Rico under the Macy’s and Bloomingdale’s banners. The firm also operates the macys.com and bloomingdales.com Web sites.

Despite concerns about a cash-strapped consumer, Macy’s has put up strong numbers. Per-share profits in fiscal 2012 ending in January are expected to be $2.81 to $2.83 per share (final numbers were reported after the newsletter went to press), up from $2.03 in the previous year. Per-share profits have beaten the consensus earnings estimate in each of the last four quarters.

A big help to the top and bottom line has been the Internet. Online sales positively affected the company’s same-store sales numbers in the fiscal fourth quarter by 1.7 percentage points (same-store sales for the quarter overall were up 5.2%). Thus, the company’s Internet efforts are truly moving the needle, and should continue to help the company’s growth.

For fiscal 2013, per-share profits should jump 16% to $3.27. The sharp rise in profits has fueled healthy dividend growth. The company recently doubled its quarterly dividend to 20 cents per share, payable April 2.

At that level, the firm’s payout ratio (the percentage of profits being paid out in dividends) is a fairly modest 28%, which implies there is plenty of upside for the dividend over the next several years.

Macy’s stock is trading just off its 52-week high of $36.37 per share. However, these shares traded well into the $40s in 2006 and 2007, so there appears to be plenty of upside based on historical trading patterns.

The stock trades at less than 13 times fiscal 2012 earnings estimates. That is not necessarily cheap, but nor is it pricey for a company posting double-digit earnings growth. Macy’s scores well in our Quadrix stock-rating system, with an Overall score of 85 (out of a possible 100) and a Value score of 74.

Please note that Macy’s offers a direct-purchase plan whereby any investor may buy the first share and every share of stock directly from the company. Minimum initial investment is $500. Subsequent investments are a minimum $50.

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