Macy’s, Inc. (M), Target Corporation (TGT) – U.S. Retailers: 3 Companies and Only 1 Long Opportunity

The multi-line retail industry is very competitive. How a firm creates value relative to other players is crucial to determine profitability in the long run. In this article, we try to determine what department store stocks the investors should buy.

The premium leader

I would advise investors to focus on Macy’s, Inc. (NYSE:M), as this company shows strong fundamentals:

• Operating Margin of 9.6%, higher than the industry median of 4.2%
• Net Margin of 4.8%, higher than the industry median of 2.8%
• Return on Equity (ROE) of 22.1%, higher than 87% of companies in the industry
• Return on Assets (ROA) of 6.4%, expanding the last four years
• Return on Capital (ROC) of 28.7%, doubling the industry median

In terms of valuation, the stock sells at a current P/E of 14.3 times, trading at a discount compared to an industry average of 16.5. Analysts’ expectations imply a forward P/E of 11, also trading at a discount to peers. With respect to the P/B ratio, 3.2 indicates a discount compared to the industry average of 3.4, and an interesting upward trend.

With respect to financial analysis, we can highlight that in the first quarter of 2013, Macy’s, Inc. (NYSE:M) experienced growth in revenue and net income.

Due to the lower number of total shares outstanding, its earnings per share (EPS) growth was 27.9%, from $0.43 per share to $0.55 per share, compared to the same quarter a year ago, better than the consensus estimate of $0.53. The company has demonstrated a positive pattern of EPS growth over the past three years, and it is expected that this upward trend will continue.

Reshaping strategy, high performance relative to comps

operates general merchandise stores in the United States. The company operates in three segments: U.S. retail, U.S. credit card, and Canadian. Although Target Corporation (NYSE:TGT)‘s primary growth drivers are new store openings in the U.S., the company has to restate the strategy of differentiation because competition is fierce.

The metrics shown below are better in comparison to the industry, but they all show a downward trend since 2011.

• Operating Margin of 7.3%, higher than the discount stores industry median of 3%
• Net Margin of 4.1%, higher than the industry median of 1.8%
• Return on Equity (ROE) of 18.1%, higher than 83% of the companies in the industry
• Return on Assets (ROA) of 6.2%, higher than 71% of the companies in the industry