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Macy’s Inc Breaks the Cycle, Firms Up Turnaround Effort

The iconic department store chain may finally be proving it's still relevant

By James Brumley, InvestorPlace Feature Writer

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Despite Rally, Strong Catalysts Still Make Macy's Stock a Buy

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The long sales-growth drought that’s made life miserable for shareholders of Macy’s Inc (NYSE:M), as well as for owners of rivals like Kohl’s Corporation (NYSE:KSS) and J C Penney Company Inc (NYSE:JCP), may finally be coming to a close. The department store chain posted its fiscal fourth-quarter numbers Tuesday morning, reporting impressive same-store sales growth that catapulted Macy’s stock higher.

Is Macy’s completely out of the woods? Probably not. But the light at the end of the tunnel isn’t an oncoming train.

More important, it’s clear now that the company has a firm hand on the steering wheel and isn’t so subject to the retail apocalypse Amazon.com, Inc. (NASDAQ:AMZN) put into motion just a few years ago.

Macy’s Earnings Recap

For the quarter ending in early February, Macy’s turned $8.66 billion worth of sales into an operating profit of $2.82 per share. Though the top line fell short of analyst expectations of $8.68 billion, the bottom line was better than the anticipated earnings of $2.71 per share of Macy’s stock. Moreover, total revenue grew 1.8% for the quarter in question, and earnings were well up from the year-ago tally of $2.02 per share.

Better still, the fourth quarter brings an end to a streak of eleven quarters of declining year-over-year sales. Perhaps most impressively, same-store sales grew 1.3% (or were up 1.4% when counting leased areas) versus estimates for only a 0.4% increase.

CEO Jeff Gennette commented on the results,

“Macy’s, Inc. had a solid fourth quarter, including strong performance in January, and the full year exceeded our expectations for annual comparable sales and adjusted earnings per diluted share. We are encouraged to see a trend improvement in our brick & mortar business, and we had the 34th consecutive quarter of double-digit growth in our digital business,” adding to his statement in the earnings press release “Consumer spending was strong in the fourth quarter, and we were ready with improved execution and great products across all categories.”

Although the quarter in question lasted 14 weeks rather than the typical 13 weeks, that benefit was negligible given the timing of the holiday shopping season and the irrelevance of the five-week span after Christmas.

Looking Ahead for Macy’s Stock

While investors are certainly cheering last quarter’s results, the bulk of the big gain Macy’s stock dished out on Thursday likely stems from the company’s full-year outlook, which suggests more forward progress is in store.

While total sales are projected to fall between 0.5% and 2% for the year that’s got more to do with store closings than not, as eleven stores are to be shuttered early this year. Removing the adverse impact of those closures, same-store sales are projected to come in flat or grow as much as 1%.

Still, the cost-saving associated with those store closings — in conjunction with other business-building initiatives — should drive profit growth. Macy’s is calling for earnings of between $3.55 and $3.75 per share. That progress is largely the result of the Gennette-led North Star Strategy.

Unveiled in May of last year, the North Star Strategy is a five-pronged plan that encompasses the use of technology to enhance the overall customer experience, securing adequate funding for initiatives and restoring Macy’s prior dominance as a trendsetter and fashion-leader.

Although the plan itself is long on slogans and short on specifics, it does seem to be making a difference. One of the notably helpful pieces of the North Star overhaul is the success of its loyalty/rewards program. While the program may have been part of the reason for slightly thinner gross margins last quarter, it was worth the cost. More initiatives to look for this year are mobile checkouts, more pop-up shops and a new employee incentive plan.

Bottom Line on Macy’s Stock

Like other rebuilding initiatives, some of those will work better than others. More of them are working than not now, however, suggesting the turnaround is for real now that Macy’s has figured out how to compete in the modern consumer environment.

Interested investors may not want to step into Macy’s stock right after Tuesday’s big jump, but it’s a name that’s earned a spot on your watchlist for a potential purchase on any decent pullback.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/macys-inc-breaks-the-cycle-firms-up-turnaround-effort/.

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