This Retailer Still has a Long Runway for Growth
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Most retailers posted stronger than expected sales growth in August as consumers took advantage of back-to- school promotions and came out strong in the month to snap up good deals. Same store sales at Gap (NYSE: GPS), the biggest U.S. specialty-apparel retailer, climbed 9%, beating the average projection for a 5.5% gain. Department-store chains including Macy’s (NYSE: M) and Kohl’s (NYSE: KSS) also posted better than expected same store sales growth of 5.5% (vs. consensus estimates of 3.3%) and 3.4% (vs. consensus estimates of 1.9%), respectively. Let’s analyze the valuation multiple of these retailers with respect to their future growth prospects.
|
Company |
Macy’s |
Kohl’s |
Gap |
|
Forward P/E |
10.62 |
10.31 |
15.10 |
|
Next Year EPS Growth |
12.40% |
11.10% |
13.30 |
|
Next 5 Year EPS Growth |
12.90% |
10.84% |
10.03% |
Source: Yahoo Finance
On the basis of these metrics, Macy’s is clearly the stand out winner. Over the next five years, Macy’s has the best annual growth rate and yet it is trading at a ~30% discount to Gap. Macy’s also declared a regular quarterly dividend of $0.20 per share on its common stock (payable on 1st October 2012). Although Macy’s by no means is a "high-yielding” stock, but its dividend yield of 2.0% stands well above Gap’s 1.40%. The following are key reasons that make me bullish about the company’s growth prospects.
Consistent Performer
Macy’s has been consistently gaining market share from competitors like J. C. Penney (NYSE: JCP) and Kohl’s from the last 3 years. Macy’s has successfully executed on its three core initiatives (My Macy’s, Omnichannel strategy and MAGIC selling) and as a result, the company has seen a consistent same store sales growth. The following chart summarizes the quarterly same store sales growth posted by Macy’s from 1Q10 onwards.
|
1Q10 |
2Q10 |
3Q10 |
4Q10 |
1Q11 |
2Q11 |
3Q11 |
4Q11 |
1Q12 |
2Q12 |
|
6% |
5% |
4% |
4% |
5% |
6% |
4% |
5% |
4% |
4% |
Going forward, I think these initiatives will further help the company to maintain its consistent growth profile.
- My Macy’s
The My Macy’s localization initiative has been a great success over the past few years and still possesses a long runway for growth. The company continues to implement new strategies across its districts which are based on learning from My Macy’s over the past few years; the recent success among them being the company’s initiative to attract the millennial customer into its stores.
- Omnichannel Strategy
Macy’s has been bearing fruits with heavy investment in technology to support its Omnichannel strategy, which is focused on satisfying customer demand across all channels including online, in stores and via mobile. These investments include technology and infrastructure to drive sales growth and improve customer experience. The online sales growth of 37.4% in August and 35.2% year to date suggests that the consumer response has been good so far and I expect these investments to drive incremental sales while also benefiting gross margins.
Store-to-Door Initiative
Following a successful 23-store launch, Macy's is aggressively expanding its Store-to-Door program throughout 290 store locations this fall. Under this program, if a store is out of a product, it will be shipped to the customer’s home from another store. In an effort to get more products to more customers, Macy’s will use the inventory of 292 stores to fulfill online orders when its fulfillment stores are out of stock. This tactic could save time and shipping costs for the consumer and prevent Macy’s from putting some items at retail stores on clearance since they could be sold at full price to a consumer looking online. I think these initiatives will help the company to drive good results in the latter half.
Longer term, I think Macy’s will continue to post consistent mid-single digit same store sales driven by broad based strength in stores, online, at Macy’s and Bloomingdale’s. Additionally, Macy's with a relatively low mix of private-label goods (20% of sales) versus other department stores is better positioned to offset higher product costs by relying more on vendors versus its peers. Gross margins should improve with fulfillment initiatives, increased penetration of private/exclusive brands and price optimization.
Thus, I believe the store to initiative will drive strong results in the near-term and the company’s successful execution of its core M.O.M strategies will drive strong long-term results. Given the latest developments at Macy’s, I am confident that Macy’s has enough growth drivers to continue its strong performance. While the stock has seen a 10% gain in the last month, I still feel the company is undervalued at the current levels. Thus, I recommend buying this stock.
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