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The shares of retailers have been very weak in the recent month. The fear is that the consumer is taking a "hiatus" and will significantly cut back on expenditures. Consumers are saving up for big ticket items such as automobiles leaving little room for more discretionary purchases. The recent 10% decline in Macy's (M) in my opinion offers a compelling entry into the retail space. The article below will detail my thoughts on why M makes an excellent addition to my portfolio.

M Chart

M data by YCharts

M is a traditional department store with over 800 locations. The company operates in 45 states and isn't dependent on any one particular part of the country for its sales. The company ran into significant problems in the 2008-2009 timeframe necessitating a dividend cut to conserve cash and customers held back on spending. The company embarked on an ambitious plan dubbed My Macy's to transform the company and revive its sagging fortunes. As we can see from the table below, the plan is working with earnings more than doubling since 2009.

Year

2007

2008

2009

2010

2011

2012

Revenue in millions

26,313

24,892

23,489

25,002

26,405

27,685

Earnings per share

2.18

1.29

1.41

2.03

2.88

3.45

Dividends per share

.52

.53

.20

.20

.35

.70

Shares outstanding

419.7

420.1

420.80

423.3

414.18

387.7

Net profit margin

3.7%

2.2%

2.5%

3.5%

4.7%

5.1%

Net profit margin growth is the key metric I use to evaluate the company. As we can see form the table above, net profit margins have more than doubled since 2008. I would like to highlight the net profit margin for 2007. In 2007, the U.S. economy was booming so naturally it would be a very profitable year for retailers. M ran a 3.7% profit margin in that time frame, yet in 2011 in a far from robust economy it was able to generate similar sales with a higher net profit. This speaks well for the turnaround plan initiated by management. Interestingly, Nordstrom (JWN), a smaller more upscale competitor, reported a net profit margin of 6.2% in the same time frame. Unlike M, JWN profit margin peaked at 6.5% in 2010 and has declined to its present level of 5.9%. I believe in time M's net profit margin will equal if not surpass JWN's adding a nice tailwind to earnings and by extension the share price.

Now that management has a credible plan in place to turn the fortunes of the company around how is it going to reward shareholders? The first portion is through dividend growth. M has not only restored the dividend to its pre-2008 level, it has surpassed it. The dividend was raised to its current 25 cents per share level on May 15; giving investor's an early Christmas present. At its current rate of roughly $1 per share, M yields north of 2%. The dividend yield is certainly acceptable in today's low interest rate environment.

The second part of the announcement that day really caught my attention. Management raised its buyback authorization by another $1.5 billion. The following excerpt from its press release neatly sums up the company's buyback level to date. "The company repurchased approximately 9.2 million shares of its common stock for a total of approximately $446.7 million in the second quarter of 2013. In the fiscal year to date, the company repurchased approximately 17.5 million shares of its common stock for approximately $806.5 million. At Aug. 3, 2013, the company had remaining authorization to repurchase up to approximately $2.2 billion of its common stock." By my calculations the buyback equates to roughly 4.5% of shares outstanding so far this year. Going forward, at its current market cap of $17 billion, the authorization is good for an additional 12 percent of shares outstanding.

With revenue trending higher, combined with a rising net profit margin and fewer shares outstanding is an equation for success. In my opinion, management gets it and is executing its plan superbly. I expect the rest of the year's sales to be adequate and I have used this opportunity to initiate a position. Thank you for reading and I look forward to your comments.

Source: Macy's: The Newest Addition To My Portfolio

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.