In the department store and apparel sector, a few companies lead the bunch. These are usually retailers that target upscale clienteles. J.C. Penney Company, Inc. (NYSE:JCP), Macy’s, Inc. (NYSE:M) and Nordstrom, Inc. (NYSE:JWN) fall into this category. Therefore, I will analyze these stocks in order to elucidate if they provide attractive investment prospects:
A valuable stock in the short term?
A few weeks ago, I wouldn’t have hesitated to recommend buying J.C. Penney stock, but the recent dismissal of CEO Ron Johnson, the man who created the Apple stores, makes me rate it as a hold case now. Like Bloomberg Businessweek acknowledges, “firing Ron Johnson won’t be a Panacea for J.C. Penney Company, Inc. (NYSE:JCP).” Although Johnson didn’t quite deliver the expected results, replacing him with Mike Ullman, who had in turn been laid off and substituted by Johnson in late 2011, is probably not the most creative move, but does serve the purpose of stabilizing the business.
Despite the negative remarks, one cannot catalogue J.C. Penney Company, Inc. (NYSE:JCP) as a failure or a sell case. As stated by Zacks analysts, “J. C. Penney´s well diversified supplier base, compelling private and national brands, marketing campaigns, point-of-sale technology initiatives as well as effective cost and inventory management should drive sales and margin trends over the long-term.” Furthermore, Johnson´s renewed strategy has retrieved some good results as the new standalone stores, not located in malls like they used to be, offer higher margins and growth than the mall-based stores. Actually, sales per square foot in these shops double the ones in old locations.
Sephora, J.C. Penney Company, Inc. (NYSE:JCP)‘s cosmetics company, provides extra confidence to stockholders as it continues to outperform in attracting younger and wealthier customers. Meanwhile, other revamping plans for J.C. Penney Company, Inc. (NYSE:JCP), like a new pricing strategy, various merchandise and cost reduction initiatives and overhauling of the clients’ shopping experience, have meant an $800 million reduction in costs for FY 2012 and are expected to deliver another $900 million in savings by the end of FY 2013. Although currently going through a rough patch, I would not lose track of
this company as it might become a value investment any time soon.
While J.C. Penney Company, Inc. (NYSE:JCP)’s stock fell by over 50% since Ron Johnson assumed the CEO mantle, Macy’s stock rose by more than 40% over the same period. Although currently at a 52-week high of $46.64 (as of May 8th), meaning that the market share gained from J.C. Penney is already priced in the shares, I would still recommend buying, like Barrons and Morningstar analysts consensuses suggest.
Comps are expected to grow by 3.5% during FY 2013 as a result of price and inventory management optimizations, private label offering and merchandise planning.
The Omni-channel strategy has returned amazing results, as online sales grew over 48% just during January 2013. Capital investments like the Arizona fulfillment center expansion certainly prove management’s confidence in the future results of the online sales plan.
An active management of free cash flows has ameliorated Macy’s, Inc. (NYSE:M) capital structure. In 2012, alongside repaying debt of $1.8 billion and making some necessary investments, the company paid considerable dividends, yielding 1.79%, and repurchasing stock for $1.35 billion. Furthermore, having the company generated over $2.2 billion in in net cash flow from operating activities (FY 2012), CFO Karen Hogue recently declared that excess cash will be used for further stock buybacks for over $1.5 billion and an increase in the already substantial dividend yield.
Strong fourth quarter results portray an encouraging outlook as sales increased by 7%, year over year, to $9.35 billion and earnings grew by 20%, reaching $2.05 per share and beating Zacks Consensus Estimate by 7 cents. This is not the first time results have come in better-than-expected. Macy’s, Inc. (NYSE:M) earnings have been outperforming estimates by an average of 38.5% for 11 consecutive quarters now. Initiatives described above lead me to believe that this trend will continue.
In terms of valuation, Macy’s, Inc. (NYSE:M) trades at 13.7 times P/E, a discount price relative to its peers, which exchange, in average, at 16.9 times P/E.
A good pick
Although at first I felt a little hesitant about Nordstrom, Inc. (NYSE:JWN), I now believe that overweighting its stock would not be a bad idea. As stated by seekingalpha.com analysts, this company offers sustainable payouts and strong sources of profitability. Below I will list the principal reasons to believe that Nordstrom, Inc. (NYSE:JWN) is a good pick: