This Retailer May Have More Upside in Store

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Despite lagging consumer confidence and purchasing power, some retailers appear to be doing reasonably well at the moment. A case in point is Macy’s (NYSE: M), which reported earnings before the bell on Tuesday. The department store’s results came in above Wall Street expectations, beating on the top as well as the bottom line. Additionally, the company is valued at a discount to the market and some of its major competitors. Having been in the news recently due to the drama between CEO Terry Lundgren and partner Martha Stewart, let’s take a look at the earnings report and the company’s valuation.

Stock at a Glance

Macy’s is one of America’s largest department store chains, operating under the Macy’s and Bloomingdale brands. The company manages around 850 stores in the United States, and has about 171,000 employees. The stock offers a 2% dividend yield, and with a beta of 0.93 also offers slightly lower volatility than its benchmark. The stock has seen some big moves over the last year, and has ended up about 4% higher in this period.

Earnings Beat

Last Tuesday before the bell, Macy’s delivered its rather upbeat Q4 2012 earnings report, beating analyst expectations for EPS as well as revenue. Excluding items, Macy’s delivered quarterly EPS of $2.05, up from $1.70 a year earlier and topping the consensus of $1.99. For the top line, the company reported revenue of $9.35 billion, up 7% from a year ago versus a consensus of $9.3 billion. For the full-year, same-store sales rose 3.7%, down from 5.3% in 2011. In any case, Macy’s has been blowing rival J.C. Penney (NYSE: JCP) out of the water in recent years. Earnings have consistently come in stronger, and analysts expect severe losses for J.C. Penney in 2013, whereas Wall Street is expecting continuing strong growth from Macy’s.

Martha Stewart and J.C. Penney Rivalry

Both retailers have been in the news a lot lately regarding their rivalry and subsequent lawsuits over the Martha Stewart Living Omnimedia (NYSE: MSO) brand of products. Stewart recently announced an alliance with J.C. Penney, allegedly a breach of contract, as Macy’s contends it has the exclusive right to sell certain Martha Stewart products. Apparently, CEO Terry Lundgren was so appalled at the news that he hung up on Stewart. The brand is important to Macy’s, growing roughly twice as fast as the rest of Macy’s. It remains to be seen how this drama will play out in court.

Valuations and Metrics

Macy’s looks fairly cheap at the moment. The company trades at TTM earnings of 12x, substantially lower than the industry average of 18.8x. The 5-year expected PEG is only 0.87 and the forward P/E is around 10x. The operating margin of 9% is more or less on par with the industry, but the return on equity is good at 23.65%. J.C. Penney’s metrics are fairly bleak. The stock has a negative PEG ratio, a negative operating margin, and a negative return on equity. These poor numbers are reflected in the stock’s 12-month performance, down nearly 50%.

Bottom Line

Macy’s strong performance risks are overshadowed at the moment by the drama surrounding Martha Stewart’s J.C. Penney deal. However, the company is doing well, as evidenced by its most recent earnings report, which beat on the top and the bottom line. Additionally, the company is priced at a discount to the industry average. Based on these factors, it looks as if Macy’s might be able to deliver more upside in 2013 if it can keep up its solid growth.


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