Macy’s, Inc. (M): The “Magic” Is Still Driving Results

The Results

Aside from a one year drop in 2009, the tail end of the recession, the company’s top line has grown steadily for a decade. The bottom line, meanwhile, fell notably in 2009 and then started on a recovery path. By 2011, earnings were above pre-recession levels.

And, despite the focus on quality service, the company’s profit margins have improved from the low teens to the high teens/low twenties. You can charge more for good service.

The Walt Disney Company (NYSE:DIS) shares are rarely cheap. So growth investors might like the stock. Income minded investors, meanwhile, should keep Disney on the wish list for a price pullback.

Why is this Special?

Taking a moment to compare the experience at Macy’s, Inc. (NYSE:M) and The Walt Disney Company (NYSE:DIS) to a company that doesn’t focus as much effort on customer service helps show why this pair is so special. Wal-Mart Stores, Inc. (NYSE:WMT) is the largest retailer in the world. Its entire business is based on ruthlessly low prices. That is and will remain a powerful business model.

However, Wal-Mart Stores, Inc. (NYSE:WMT) stores are cavernous and impersonal. Employee relations seem to be a constant issue, spilling over into customer relationships. Sure, cheap prices brings customers in the doors, but low-end service has given competitors an in.

For example, Target Corporation (NYSE:TGT) focuses on the customer experience with chic stores. It charges more than Wal-Mart Stores, Inc. (NYSE:WMT), which helps explain why Target’s profit margin was a full percentage point higher in 2012. That may not sound like much of a difference, but in an industry with notoriously thin margins its huge.

That said, Target Corporation (NYSE:TGT)’s margins have compressed a full percentage point since peaking in 2007. A continued push into lower-margin grocery items to compete with Wal-Mart is partly to blame. However, the company’s push into Canada also opens up the company’s growth prospects, particularly if this winds up being the first step toward a broader international push. Based on the company’s U.S. expansion, though, it will likely progress at a conservative pace on this front.

There are reasons to like Wal-Mart Stores, Inc. (NYSE:WMT), including its size and global reach. However, for investors looking for companies that excel because of customer service, Target Corporation (NYSE:TGT) is the better choice. Growth investors should like Target as it begins to expand internationally, while income investors should watch for a pullback.

Service, Service, Service

Macy’s, Inc. (NYSE:M), Disney, and Target Corporation (NYSE:TGT) all prove that treating customers well is good business. Its exactly the type of distinction that investors should be looking for. The unfortunate part is that investors see the results that these companies have achieved and generally afford the shares premium prices. That said, they are exactly the types of companies to keep on a wish list for a broad market sell off.

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Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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