Macy's

5/12/12

We got another rocky, negative week for stocks on Wall Street, which I don’t see an end to in the near future.  There are still continuous problems out of Greece and Spain, and with the recent stellar headline from none other than good ‘ole JPMorganChase, I look for the banks to continue to trade lower, with the exception of US Bank and Wells Fargo.  With US Treasuries trading at all-time highs almost daily, clearly the market is still in conservative mode, which again means owning the TLT and high dividend payers like Verizon and AT&T (both received upgrades from Credit Suisse on Friday).  Looking at the CBOE Volatility Index (VIX – Fear Gauge), which closed at its second highest level since early April, there is still a lot of uncertainty among investors.  I continue to remain semi-bearish on equities and bullish US Treasuries.

This week I am taking a look at the retail sector and no; it’s not Ross Stores, the retailer that Jim Cramer talks about all the time.  Instead, I am looking at a store for your average consumer, one that just reported a quarter in which is blew away analysts estimates…that stock is Macy’s (M).  The company owns and operates almost 800 stores Nationwide under the names Macy’s and Bloomingdales, including 7 Bloomingdales Outlet stores.  Macy’s sports a market cap of $15.75B and pays out a 2.10% dividend or $0.80/share.  It is extremely cheap at these prices, trading at just 10X forward earnings and a PEG ratio of just 0.87, a steep discount to competitors JCPenny and Saks.  

On Wednesday, Macy’s reported another outstanding quarter that beat Wall Street estimates.   First quarter net income grew a whopping 43% to $181M, which translates into $0.43/share.  Operating income grew 18% to $391M and made up 6.4% of sales, which was almost 1% greater than last year.  Same-store sales, or sales of stores open at least 12 months, increased 4.4%, which was well above management’s expectations of 3.2% growth.  Sales between Macy’s and Bloomingdales totaled $6.1B, including online shopping.  Management cited that they are seeing more and more opportunities to satisfy demand from customers when they are in the store with inventory that comes from other locations and from their direct-to-customer distribution centers.  Online ordering has been a big growth area for Macy’s as they are beginning to satisfy online demand with store inventory when distribution centers are out of the particular item, thereby decreasing excess inventories.  Macy’s currently has 80 stores ready to fulfill orders from online demand, and expect to have about 300 store locations by holiday season.  This type of growth will allow Macy’s to improve productivity of their inventory and store square footage.  Management saw Women’s Apparel sales stronger than expected in Q1, especially with the 22-30 year old demographic.  Staying with inventory, Macy’s saw an increase of 8% with units down 4% in Q1.  Gross Margins contracted less than half a percent to 38.8% with merchandise margins flat.  Expenses for Q1 ended up 1.1%, mainly due to more credit being given out.  At the end of their quarterly report, management reiterated Macy’s full year guidance of about a 3.5% increase in sales and earnings of $3.25-$3.30/share.

All-in-all, it was a very strong quarter but the stock ended up getting hammered, falling 4% on Wednesday, to close just above the 78.6% Fibonacci Retracement of $37.99.  Friday’s close of $37.98 continues to show how important the Fibonacci levels.  I think the stock is at a decision point right now, and I think it trends higher.  Macy’s seems to want to put in a base at the support level of $37, a level it hasn’t traded below since late February.  I see no reason to wait for the stock to pull back any further, instead I want you in this stock on Monday.  Helping this stock is the bullish action by analysts, as there are 13 buys, 6 holds and 0 sells with an average price target of $44.37 a cool 17% gain.  I’m looking for a move up to $45 even, which is only 8% higher than its current all time high of $42.17. 

Full disclosure: I am currently long Macy’s with a June 35 call option.

Jeff Lewison