Macy's Still Has the Magic
09/13/2010 12:30 pm EST
Taesik Yoon, the new editor of Forbes Growth Investor (replacing Vahan Janjigian, who moves to money management), thinks the famed retailer’s stock has more room to run.
Macy’s (NYSE: M) is one of the largest domestic retailers, operating 850 department stores in 45 states, the District of Columbia, Guam, and Puerto Rico under the Macy’s and Bloomingdale’s banners.
The company’s large-format stores offer an extensive range of merchandise, including men’s, women’s, and children’s apparel and accessories; jewelry and cosmetics; home furnishings, such as bedding, linens, and kitchen products, and other consumer goods.
While Bloomingdale’s caters to a slightly more affluent consumer, both banners carry numerous brands covering multiple price points. This includes an extensive collection of company-owned, private-label brands, which offer value-priced alternatives across numerous merchandise categories. Macy’s also operates Macys.com and Bloomingdales.com retail Web sites.
Fiscal 2009 continued to feel the effects of weak shopping trends spurred by the economic downturn. Net sales fell 5.6% to $23.49 billion, and same-store sales declined 5.3%. But actions taken in 2008 helped lead to improving sales and profit trends throughout the year.
This included the reorganization under a unified operating structure and the rollout of the “My Macy’s” localization program, which allowed stores to tailor merchandise offerings to better serve its local customer base. Macy’s also placed more emphasis on promoting its private-label brand merchandise.
As a result, 2009 adjusted net income grew 11.9% to $1.41 per share. The improving business trends have continued in fiscal 2010 with first half sales up 7.2% to $11.11 billion, boosted by a 5.2% rebound in same-store sales. The adjusted operating margin improved 218 basis points to 5.16%.
Adjusted earnings rose tenfold to $170 million, or 40 cents per share, from just four cents the prior year. The uncertain health of consumer spending remains the key concern. Should it trend weaker than expected, Macy’s sales will likely feel the pinch.
Yet near-term prospects remain bright. Same-store sales for July were up 7.3%, which was well above the 5.3% consensus estimate. Macy’s now expects same-store sales growth of 4-4.2% versus a prior estimate of 3-3.5%, [and] earnings of $1.85-$1.90 per share, up from $1.75-1.80 per share. This represented the second increase in annual guidance this year.
Several factors should help the company meet or exceed this estimate, [such as] additional benefits from its store-localization program and continual emphasis on its private-label merchandise. Additionally, by the beginning of this month, Macy’s will have trained roughly 130,000 sales associates and managers on how to effectively engage potential customers in what is the most comprehensive training effort in the company’s history.
Online sales, which have exhibited strong growth throughout the downturn—up 29% in 2008 and 19.6% in 2009—and climbed 28.1% through the first half this year, should continue to enjoy strong growth, especially now that stores are capable of accessing online inventory to satisfy customers.
Despite this rosy outlook, valuation remains compelling. Given the continuation of strong results, the stock has the momentum to go significantly higher. (The shares closed below $21 Friday—Editor.)