Is Macy’s a Good Investment at the Moment?

Macy's (M)Macy’s, Inc. (NYSE:M) had a big day on Thursday, eclipsing the $40 mark for the first time since mid-October. On the whole, shares of the department store retailer were up more than 6% on the first day of November, as the company increased its same-store sales-growth forecast for the second half of its current fiscal year. Macy’s preliminary Q3 sales beat expectations, and more importantly, October same-store sales were up 3.6%, a full half percentage point higher than consensus estimates.

A few notable investors benefiting from these gains were hedge fund legends like Jim Chanos, Jim Simons, Cliff Asness, George Soros (see Soros’s entire portfolio here), and Steven Cohen. Here’s a complete list of the money managers invested in Macy’s; we’ll explain exactly why it wouldn’t be a bad idea to “monkey,” or mimic these guys when considering an investment in the retailer.

The phenomenon known as “Christmas creep,” when retailers begin to advertise for the winter holiday season a full two months in advance, has worked to Macy’s advantage this year. In general, it appears that shoppers prefer longer sales over the holiday season, especially when shopping for clothing, as lengthened periods of low prices make it easier to adequately budget for gifts. Using basic logic, this makes complete sense, despite the cries of a small minority that the sales conflict with other holidays, like Halloween for instance.

In 2012 as a whole, Macy’s has been particularly kind to investors’ pocketbooks, as shares of the company are up more than 25% year to date. This return has been more impressive than peers like Kohl’s Corporation (NYSE:KSS)Nordstrom, Inc. (NYSE:JWN) and Saks Inc (NYSE:SKS), which have made an average of 11.7%. Of Macy’s closest competitors, only Dillard’s, Inc. (NYSE:DDS) has been a better investment. Riding the strength of a well-planned share buyback program, Dillard’s has gained a whopping 488.2% over the past three years, and 78.5% in 2012 alone.

Despite Dillard’s massive appreciation, it still trades at relatively attractive valuation metrics, including a trailing P/E of 8.3X and a forward P/E of 12.3X. Macy’s, meanwhile, is also cheap, trading at trailing (12.8X) and forward (10.6X) earnings multiples below Kohl’s (13.0X, 10.8X), Nordstrom (18.2X, 14.4X), and Saks (25.2X, 18.3X).

One area that puts Macy’s on top, even ahead of Dillard’s, is when we factor earnings growth into its valuation. Using the PEG ratio, which normalizes the P/E using forward-looking EPS estimates, we can see that Macy’s is rather cheap. The retailer trades at a PEG of 1.17, which is a direct result of very bullish sell-side analyst EPS estimates. In particular, the Street is forecasting Macy’s EPS growth to average 10.9% a year through 2017, which is far above Dillard’s (5.5%), and most of it peers. Dillard’s, meanwhile, trades at a PEG ratio of 1.52.

Nordstrom trades at parity with Dillard’s in terms of its earnings growth, while Saks sports a PEG ratio that’s a bit higher, at 1.66. Of the five department store retailers we’re discussing here, only Kohl’s looks more attractive, as it trades at a PEG of 1.13. Now, Kohl’s five-year EPS growth is estimated to be close to 12% a year, driven in part by the company’s innovate “Kohl’s Cash” coupon system, and its own exclusive-label sales.

In we were buying any of these retailers based on efficiency alone, Macy’s would take the cake. Led by the company’s “fulfillment logic” strategy, as CFO Karen Hoguet has called it in the past, Macy’s has been able to produce the industry’s second best gross margin, at 40.4%. Of the peer group discussed here, only Saks has a better gross margin, 20 basis points higher. In Macy’s second quarter earnings call, Hoguet had this to say about her company’s improved efficiency:

We are also now utilizing the fulfillment logic, which is directing our orders more intelligently. The logic is based primarily on filling orders from stores or warehouses with the lowest sell-through of a particular item, as well as the distance to the customer’s home.

In response to a question about any fulfillment glitches Macy’s has been rumored to be dealing with, Hoguet also shed some light on the issue:

Well, there is always going to be examples of individual customer orders where a mistake happened. But by and large, our fulfillment rates coming out of the stores are getting very close to the same accuracy and on-time rate as that in the distribution center. So again, I can’t tell you that one of you didn’t have a bad experience or somebody didn’t. But in total, we are doing a spectacular job in fulfilling the orders out of the stores, frankly better than I thought we could do. So it’s really quite encouraging.

In general, it appears that Macy’s margin advantages are internally driven, and can be improved even further going forward. This would provide an even bigger boost to the company’s bottom line, which has beaten the Street’s estimates in five consecutive quarters. By the end of its 2013 fiscal year, analysts are expecting Macy’s to finish the period with earnings of $3.38 a share, up 17.4% from the $2.88 it reported last year.

To recap: Aside from Dillard’s, Macy’s has been the best department store retailer to invest in this year, and if the company’s recent fiscal results are any indication, the ride doesn’t look like it’ll end any time soon. Macy’s has a more attractive valuation than the majority of its peers, and has a better fundamental outlook than any of its competitors mentioned here. “Christmas creep” should continue to benefit the company as we head into the height of the holiday shopping season, so if you haven’t already, it looks like a good time to consider adding Macy’s to your short list. Bulls like Soros and Simons seem to agree, but don’t take our word for it, check out all billionaires invested in Macy’s on Insider Monkey here.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

5 Retirement Mistakes To Avoid (and Einstein’s Famous Quote)

11 Smartest People in the World

6 Films About the Financial World You Need To Watch (While “The Wolf” is Not Around)

Warren Buffett and Billionaires Are Crazy About These 7 Stocks

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!