Department store retailer Macy's (M) reported solid third quarter results Wednesday morning. Sales increased 3.8% year-over-year during the quarter to $6.1 billion, roughly in-line with consensus expectations. Earnings rose 12.5% year-over-year to $0.36 per share, exceeding consensus estimates. Before reading on, please click here for a read on how we calculate the intrinsic value of Macy's.
As we discovered earlier this week, revenue was driven higher by a 3.7% increase in same-store sales, as well as continued strong performance from macys.com and bloomingdales.com, which grew a combined 40% year-over-year. Men's tailored clothing, men's shoes, women's suits, handbags, furniture, and watches were all cited as strong performers, with juniors, tabletops, and housewares lagging. Most areas were consistent with broader trends we've seen across retail as of late; men continue to return to a more formal, tailored look, while the market for juniors and young women remains incredibly competitive. Given the velocity of fashion changes, we expect several retailers to "hit" and "miss." Luckily, the time to market for clothing has been reduced, so large misses seem more avoidable.
Macy's also mentioned a new inventory strategy for the fourth quarter. Instead of the usual inventory build going into the holiday season, inventories ticked up just 0.7% year-over-year during the third quarter. The firm intends to update stores with fresher, newer merchandise just ahead of the holiday to provide excitement and momentum right before the holidays. We like the strategy since we think it could bring a new wave of excitement for buyers, with the additional benefit of keeping inventories low and gross margins elevated.
Going forward, the firm provided interesting guidance, which includes a fourth quarter same-store sales figure of 4.2%, aggregate sales growth in excess of 7%, as well as earnings of $1.94-$1.99. The figure embeds some of management's optimism regarding cold weather during the quarter, even after accounting for lost sales from Hurricane Sandy. Full-year earnings are projected to be $3.35-$3.40 per share, which seems fairly attainable, given the current earnings run-rate and gross margin projections, which were estimated at flat-to-down. In fact, if Macy's is able to obtain solid gross margins, we think its earnings projection will prove to be pessimistic.
Shares of Macy's currently look fairly valued, in our view. Though we like the company more than Kohl's (KSS), Sears (SHLD), and JC Penney (JCP), the firm's business model simply isn't as favorable as Nordstrom's (JWN), which has both aspirational and discount stores that avoid cannibalizing each other. The company's decision to end monthly same-store sales reporting is immaterial, in our view. It could lead to more volatility in earnings and less volatility on the first of the month, but we view day-to-day fluctuations as unimportant. We won't be looking to add shares to the portfolio of our Best Ideas Newsletter anytime soon (click here for more information).