What's Macy's Amazon Plan
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Macy's (NYSE: M) beat the earnings estimates, but its shares fell anyway, possibly because investors were worried that problems at JC Penney (NYSE: JCP) could also affect Macy's. Macy's seems healthier than its department store competitors, although it faces several of the same competitive threats that have weakened other department stores. I decided to look into Macy's plans to deal with competition from discounters, Internet vendors, and other department stores that could capture its market.
Amazon's (NASDAQ: AMZN) move into the high end fashion market might actually be a bigger threat to Macy's than JC Penney, because Amazon could attract shoppers who normally visit Macy's Bloomingdale stores. With Amazon's expanding workforce and investment in warehouse technology, Macy's needed to respond, and it looks like Macy's is using a proven strategy to deal with its online competitor.
During the late 1990s, online grocery stores attracted investors' attention because they seemed like they had cost advantages over brick and mortar supermarkets. Brick and mortar supermarkets, like Safeway (NYSE: SWY), fought back by using their retail stores to manage their online shipments. Safeway had its store employees pack up groceries and then send out a truck from the store to deliver them, effectively establishing food distribution centers throughout the country.
In the Wall Street Journal, Dana Mattioli reported that Macy's is using a similar strategy to fight back against Amazon, as Macy's is using some of its brick and mortar stores as distribution centers to help deliver clothing to online shoppers. The Wall Street Journal article also reported that Nordstrom (NYSE: JWN) started shipping online orders out of its brick and mortar stores in 2009.
Exclusivity is another way for department stores to compete against each other. Amazon plans to use this strategy itself, and it has already lined up designers to create new outfits that are only available in its online store. Macy's has made significant headway toward stocking its stores and website with exclusive outfits. In a November 2011 article in Business Courier, Tom Demeropolis reports that 43 percent of Macy's revenue comes from the company's exclusive brands. Exclusive brands are one of the easiest ways for a department store to create a moat, because a discounter or big box store can't sell the same outfit at a lower price.
Macy's financial metrics seem fairly strong. Yahoo Finance states that Macy's had 38.2 percent higher earnings and 4.3 percent higher revenue for the quarter, which suggests that the department store chain has improved its efficiency. Macy's needs to be very efficient for its plan to work because of Amazon's robotic warehouses and low margins, although Amazon doesn't plan to discount its high end clothing as aggressively as it discounts other items. Macy's doesn't look overvalued, and it might actually be undervalued, as its forward P/E is 9.8 at the moment.
In February, I wrote that Macy's seemed like it would outperform, while JC Penney seemed like it would underperform, and made the corresponding CAPS calls. JC Penney's shares fell from $41.23 to $26.75, while Macy's shares rose from $36.79 to $37.29. I didn't have a perfect record in the department store sector though, as I made an outperform call on Nordstrom in March, and its shares fell from $52.86 to $50.05. Although Nordstrom's revenue growth surpassed Macy's, with Nordstrom reporting 13.2 percent higher revenue for the quarter, Nordstrom's earnings only improved by 2.8 percent. Amazon's entry into the fashion market also poses a threat to Nordstrom. Nordstrom has a strong customer service reputation, along with its in store distribution operations and its own exclusive brands, which could provide some help in its fight with Amazon.
Macy's still seems like it will hold up well as a longer term investment, although the competitive threat from Amazon and JC Penney's earnings miss could hold it down in the short run. My original CAPS call had a time frame of a year, and I still think that Macy's will outperform the market between now and February 2013.
enovinson has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com. 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.