Macy’s: Consistent yet Undervalued
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On 5th July, Macy’s Inc (NYSE: M) reported disappointing June same store sales growth of 1.2%, missing the consensus estimates 2.4%. Online sales in 2012 (macys.com and bloomingdales.com combined) were up 31.8 percent in June and 34.8 percent year-to-date compared to 2011. Macy’s same store sales growth in June was less than the 6% SSS growth posted by Saks Incorporated (NYSE: SKS) but better than the 4.2% SSS decline posted by Kohl's Corporation (NYSE: KSS). The management cited stagnant macroeconomic environment, lower spending by tourists in cities such as New York and the unprecedented renovation at Macy's Herald Square in New York City to have created more short-term business disruption than anticipated in the June sales period. However, despite the shortfall, management reiterated full-year 2012 SSS guidance of 3.7% and EPS of $3.25-$3.30. We are optimistic about the company’s growth and believe the stock to be undervalued due to the following reasons.
Lower than expected June sales not a big concern: Though, the company reported lower than expected June sales, we are not overly concerned. Tourist traffic usually peaks during the summer; therefore this should be less of a headwind during the fall season. Moreover, remodeling disruption at Herald Square should end in September and the newly renovated, world’s largest shoe department will be open in August.
“Store-to-Door” initiative in fall may provide SSS boost: The Macy’s “Store to Door” pilot (if a store is out of a product, it can be shipped to the customer’s home from another store) is set to expand from around 80 stores to 290 of the chain’s total 810 stores this year. Macy's expects to roll out “store-to-door” shipping more aggressively in fall’12. Given the concept’s success (SSS benefited around ~2%) at Nordstrom Inc (NYSE: JWN), we anticipate that this initiative may provide a boost to Macy’s SSS trends.
Share repurchase to provide support: For the first time management provided a specific share repurchase guidance by saying “we expect to buy back at least $1 billion in shares this year”. Even by conservative estimates, by assuming $1.0 billion in share repurchases we expect a 6% reduction in shares which will boost earnings per share and provide a lot of support to the stock.
M.O.M. strategies continue to drive market share gains
- Macy’s has seen 12 consecutive quarters of SSS growth after the system-wide implementation of the My Macy’s initiative in 4Q09. The company continues to implement new strategies across its districts which are based on lessons from My Macy’s over the past few years.
- Macy’s is investing heavily in technology to support its Omnichannel strategy. As a result, the company has experienced more than 30% online sales growth for 17 months in a row. In our view, Omnichannel is Macy’s largest growth opportunity in terms of both sales and margins.
- Macy’s continues to train its sales force; as of now, Macy’s associates have been through over one million hours of MAGIC selling training. Newly trained store associates with refined skills are engaging customers.
Macy’s M.O.M strategies (My Macy’s, Omnichannel and MAGIC selling) have been instrumental in the consistent SSS growth over the last three years. As a result, the company has been able to gain significant market share from its competitors, like JC Penney (NYSE: JCP) and Kohl's Corporation, since the start of FY10. Going forward, we think Macy’s strong sales momentum will continue long term, as the company’s M.O.M. strategies should continue to drive market share gains and enable strong SSS growth. We also expect Macy’s SSS to improve from June in the latter half of the year as temporary issues (lower tourist traffic nationally, Herald square renovation disruptions) collapse. The company is trading at a forward P/E of 9.43x, which we believe is inappropriate for a market share gainer with earnings upside. Thus, we recommend buying this stock.
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