Macy's: Full Potential Has Not Yet Recognized By The Markets

| About: Macy's Inc. (M)

The current global macroeconomic situation has instigated interests of investors and analysts alike as Europe has experienced a substantial slowdown and the U.S. economy is being pursued by consistent quantitative easing methodology. Despite the distress witnessed in the recent past, the economy is headed toward a recovery period as indicated by the high degree of appreciation in global equity markets. Consumption patterns also suggest that the economic activity is regaining its strength after experiencing a downswing due to the economic recession.

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Source: Trading Economics

The above chart illustrates the U.S. consumer confidence since the beginning of FY09. The chart clearly shows that a sizable improvement has occurred in the confidence of consumers across the country and this is likely to be reflected in the revenues of the retail industry. Going forward, consumer confidence will improve further as monetary expansion continues to target high unemployment and low inflation in the economy. This allows for a commendable upside potential for retail companies as the confidence of consumers will also positively reflect upon their spending propensity. Macy's Inc. (NYSE:M) is one of the major players in the U.S. retail market with market capitalization of $19.1 billion and revenues of $27.7 billion in FY12.

Stock Performance

Macy's stock price has been subject to a strong high in recent periods as predicted by consumer confidence in the previous section. The stock price of Macy's has increased from $10.98 in the beginning of FY09 to a current value of $49.

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Source: Bloomberg

The above chart shows the change in stock price of Macy's as compared to S&P500 index since the beginning of FY13. We see that the company has outperformed the bullish trend of the index over this period. This upward surge in the stock price of Macy's has proved profitable for the company's investors. In my opinion, the upswing is not over yet.

Financial Performance

Macy's has posted a very impressive financial performance in the post crisis period. The company has walked out of the recession as a stronger and more profitable company as the inherently high competitive nature of the industry has slightly tapered off due to the crisis. At the same time, the company has experienced a substantial earnings growth in recent periods.

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Data Source: Morningstar

The above chart shows the income statement figures of the company in the last five years. Since FY09, the company's revenues have shown a steady improvement; the company's net income has shown a strong upward trend after substantial losses in FY08. The net margin of the company has also shown a steady improvement over these years.

Macy's has shown strong character in its decision making by pulling off the less profitable stores and focusing on the improving industry trends. Specifically, with respect to feminine products, the company has experienced a change in its revenue profile for the segment. The feminine apparel's contribution to sales has been showing a decreasing trend as the proportion decreased from 26% in FY10 to 23% in FY12; whereas, the trend in feminine accessories appears to be taking hold as the segment has further strengthened its contribution to sales proportion to 38%.

What Should Investors Consider?

The upward surge in Macy's stock price has introduced some very interesting aspects to the investor's perspective. In order to evaluate the company as a prospective investment, an analysis regarding the company's valuation is necessary.

Data Source: Morningstar

The above chart shows some key valuation metrics of the company as compared to the industry averages. The company is operating at a high P/B ratio but that is consistent with the industry. The company P/E and P/CF ratio indicate undervaluation despite the strong upward surge in the stock price. More importantly, it appears that the company is making decisions in the favor of investor considerations in some critical components.

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Source: YCharts

The above chart shows the company's dividends and its debt-to-equity ratio since FY09. Firstly, Macy's has been consistently reducing its debt-to-equity ratio over this period. Currently, the debt proportion is still large but the company is taking measures to reduce debt to manageable levels. At the same time, the company has been increasing its dividends over the past two years. These factors are likely to stimulate investors' interest and contribute toward a further upward movement of the stock price.

Conclusion

Economic analysts have suggested that the recovery will take full swing going into FY14. This means that the economic conditions will improve and further their support to the retail industry. Macy's is strategically positioned to benefit from the recovery in U.S. economy and prove extremely profitable for equity investors in the short run. At the same time, the company is trimming down its financial risks and addressing investors' concerns by paying increasing dividends. Based on these factors, I propose a buy recommendation for long-term investors as the company's full potential has not been completely recognized by the markets as yet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.