The One Retailer To Own

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As I have mentioned in many posts, the US economy is poised to accelerate its growth rate and your portfolio should be built to benefit from such development. In other posts, I have recommended banks (such as Bank of America) but consumption still is 70% of America's GDP and retailers are one of the big beneficiaries of any jump in consumer confidence. With decreasing unemployment (now below 8%) and the housing sector in recovery mode, confidence is going to come back strongly in 2013 and 2014. Here I present my favorite retailer at current market prices: Macy's (NYSE: M).

A combination of strong execution, heavy exposure to FAB (footwear, accessories and beauty) plus a top of the list financial discipline makes me an eternal bull in M shares. Along with the S&P 500, M is up 20% year to date, but I am sure it has further room to go up given its characteristics: sustainable growth with great management.

Proof of these features was the great Q3 results: M beat expectations (again), gained market share and demonstrated its fierce expense discipline. Gross margins expanded, operating margins improved to 5.3% and same store sales increased by 3.7% year over year versus the 3.0% increase for Q2.

Great company, great business and great management is always a good long idea if you do not pay too much for it. This is Macy's case. The company is trading at 2013 x11.3 P/E, x5.6 EV/EBITDA and x6.7 price to operating cash flow, which is well below its potential.

Competitor Saks (NYSE: SKS) trades at 2013 x27 P/E, x7.2 EV/EBITDA and x11.3 price to operating cash flow. Other department stores such as Nordstrom (NYSE: JWN) also trade higher than M. JWN sells for 2013 x15 P/E and x7 EV/EBITDA. By buying SKS or JWN you would be paying a much higher price tag for the same sector.

Another fairly priced retail business that I would usually consider is Costco (NASDAQ: COST). COST is also an extremely well run corporation but it does not have the US focus I am looking for in this case. COST drives 30% of its sales and 40% of its operating income from abroad. Yes, it grows extremely fast (same store sales increased 7% YoY in Q3) but all that growth is already priced in. COST trades at 2013 x21.5 P/E and x9.3 EV/EBITDA. Besides, I am looking for the beta that M business, based on FAB, can provide me.

Macy's, paying a 2% dividend yield, does not seem a very typical pitch for a cash dividend fan like me but management has not been cheap to its shareholders. In 2011 M paid only 35 cents in cash dividends while this year the company paid a 128% increase (80 cents). At least the trend does not look bad.

Even if after the recent market rally it has been tougher to find businesses that are not only great but also fairly priced, we can still find some. M is one of them and if you are looking for a retailer, this one is a rock solid option. I bet that during 2013 and 2014 the US economy and Macy's management will do everything to help your portfolio outperform the market.


Fool blogger Federico Zaldua does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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