Why Macy's Could Top 52-Week High

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Over the next two days, we'll get a pulse on the consumer spending going into the holiday season. Watching department store chains for quarterly earnings will give us insight on sales, and show us what to expect going forward. For each company, I’ll give you the Fool scoop on who, what, when and why it all matters. First up to bat: Macy’s (NYSE: M).

What Analysts Expected
Analysts expected Macy’s to report earnings of $0.29 per share, on revenue of $6.07 billion, this morning. Actual earnings came in at $0.36 per share on $6.08 billion in revenue. That's higher on both counts compared to the year-ago quarter's earnings of $0.32 per share on revenue of $5.85 billion.

What Else to Consider
Macy’s closed the books for the quarter the same day Sandy crashed into the Northeast. Consumers in the Northeast were surely focused on other things than retail shopping for the last week of the quarter, but it wasn’t enough to ruin a strong October. Last month’s same-store sales were up 3.7%, better than expected. As CEO Terry Lundgren said, “Business was strong in October, and we delivered a solid performance in the third quarter.”

Investors watched closely, worried that Macy’s “Search and Send” deal would send EPS lower. It offers free shipping for purchases in excess of $99, provided shoppers are buying out-of-stock products that another store could provide. This was designed to keep customers from shopping with competitors, especially at online stores that offer free shipping. Seeing EPS actually rise over expectations is a valid reason for investor optimism.

The company's also succeeding with “My Macy’s,” which aims to deliver custom-tailored merchandise, size ranges, and marketing programs. All of those points should improve customers' satisfaction and shopping experience. Going forward, those are important factors in allowing Macy's to raise prices and increase margins.

Success at Competitors' Expense
One reason for Macy's recent success is the downward spiral of rival  J.C. Penney (NYSE: JCP) which is expected to report another quarterly loss Friday -- its third in a row. The rival department store has struggled in large part due to its change in sales strategy. In August, it made everyday low prices a priority over big sale advertising. Sales have reflected that its customers expected big sales advertisements and went elsewhere. J.C. Penney’s competitors have been reaping the rewards.

Macy’s isn’t the only benefactor of J.C. Penney’s woes. This week also brings earnings reports from competitor Kohl’s (NYSE: KSS). Kohl’s EPS is estimated to be $0.87, up 8.7% compared to last year’s quarter. Kohl’s customer base respond favorably to lower prices and “big” sale signs.

What Investors Want to See Going Forward
Macy’s has beaten analyst expectations the last six quarters in a row. This time, another beat on revenue and EPS gives investors a lot of optimism going into the holiday season. Management expressed confidence that it can finish the year with strong top-line growth, raising guidance for yearly EPS by $0.05. It's confident sales lost due to superstorm Sandy will be regained incrementally in the fourth quarter. All of these things together could cause shares of Macy's to pop throughout trading today.

EPS for the year was estimated at $3.35, up 12.8% from last year, but again, it's been raised to $3.40. The fourth quarter is always Macy's strongest quarter of the year, and management's confidence in a strong finish will likely delight investors.

Bottom Line
Watching these department store earnings will be helpful in judging the health of our economy and consumer confidence. If we dig deep into the earnings reports, we'll get a better understanding of how to invest going forward into the holiday season. Our economy depends on consumer spending, and Macy's was a strong start to third quarter earnings with department store chains. Investors should watch closely as competitors release earnings this week.

Macy’s has its fair share of risks. If middle- to high-income shoppers start losing confidence in an economic recovery, expect to see them start fleeing from Macy's towards cheaper competitors.

At the end of the day, Macy’s has proven its ability to beat expectations quarter after quarter. We know that it had a strong October and has successful programs boosting top line sales. Macy’s again beats expectations this quarter, shares could near or top its 52-week high going into a notoriously strong fourth-quarter holiday season.

dmiller5350 has no positions in the stocks mentioned above. You can follow Daniel on Twitter @StreetSmartFool.The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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