Kroger Shows Macy's a Way to Higher Earnings
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Kroger (NYSE: KR) mentioned both share buybacks and improved knowledge about shoppers in a recent interview transcript at Seeking Alpha. This grocery store found a better way to manage its loyalty program, with the help of the British marketing firm dunnhumby. Although Kroger's share buybacks won't help Macy's, dunnhumby also helps Macy's (NYSE: M) understand its customers better. Kroger's success could mean better earnings for Macy's in future quarters.
Kroger's announcement has already sent its shares up this week. Kroger stock traded slightly above $23 before the announcement, while closing above $25 a share on Thursday. The dunnhumby partnership has also helped Kroger report better earnings in prior quarters. In a Jun. 14, 2012 Reuters article, Lisa Baertlein explained that Kroger reported an earnings beat in 1Q 2012, earning 78 cents per share when projections called for 72 cents, as the loyalty program helped Kroger defend and expand its market share.
Although Kroger's announcement gave the grocer's stock some momentum, Macy's may offer more opportunity here. Kroger has a trailing P/E of 24 and a PEG of 1.09, which suggests that Kroger's growth has been priced in to some extent. Macy's has a trailing P/E of 13 and a PEG of 0.94, which suggests that investors have lower expectations for this department store.
This big data initiative took some time to pay off, as Kroger has been working with dunnhumby for nine years. In 2003, Kroger needed a growth driver, as its share price dipped to slightly over $13 during the aftermath of the dot-com bubble. Many new technology initiatives were canceled in the early 2000s, but Tesco's 1995 investment in dunnhumby demonstrated that this marketing firm could provide useful information to a major supermarket chain. Tesco and Kroger created a dunnhumby subsidiary, dunnhumbyUSA, together as a joint venture. Dunnhumby states that it started working with Macy's in 2007 on its website, so its Macy's contract also involves a long term project.
Traditional department stores can't match Macy's big data advantage easily. Sarah Mahoney, at MarketingDaily, reported that Macy's signed an exclusive contract with dunnhumbyUSA in 2008 that prevents dunnhumbyUSA from working with other department stores. The other major clients that dunnhumby lists on its site are mostly food, beverage, and consumer products companies whose products show up on shelves at Kroger and Tesco, such as Coca-Cola and General Mills.
Macy's does have to watch out for discounter Target, (NYSE: TGT) which might have helped convince Macy's to sign up with dunnhumbyUSA in the first place. Mike Duff, at CBS MoneyWatch, reported that dunnhumbyUSA gained even more business from Macy's in 2009, which meant that both Kroger and Macy's posed bigger competitive threats to Target. Target responded by investing more of its own resources in big data, which eventually resulted in Charles Duhigg's very well-known New York Times article about how Target figured out how a girl was pregnant before her father knew. Target did receive negative attention from this story, so Macy's big data deal does have some reputation risks.
Kroger already demonstrated how dunnhumbyUSA raised its earnings this year, and dunnhumbyUSA might have already helped Macy's report higher earnings in 2012 as well. An Aug. 8, 2012 Reuters article explained that Macy's earned 67 cents per share in 2Q 2012, surpassing expectations of 64 cents per share. Even after this earnings beat, Macy's low PEG suggests that the benefits that its deal with dunnhumbyUSA offers might not be fully priced in, which makes Macy's look like a promising investment right now.
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