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.

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