Macy's: Strong Sales, Cost Cuts And Further Growth Drives Appeal

Jan.10.14 | About: Macy's Inc. (M)

Macy' (NYSE:M) holiday season is extended for shareholders. The retail firm operating under the Macy's and Bloomingdale's brand came up with two positive news releases on Thursday.

For starters, Macy's showed a strong sales performance during the important holiday months, while it outlined plans to save another $100 million in annual costs.

Investors applaud the move sending shares to fresh highs around $55 per share. Despite the very strong momentum in recent years, shares continue to offer appeal if the market will acknowledge the strong intrinsic performance of the store chain.

Strong December Sales

Macy's announced that comparable sales, including licensed departments, rose by 4.3% in the important November and December sales combined.

Chairman Terry Lundgren attributed the strong 2013 holiday season sales at both Macy's and Bloomingdale's to fresh and distinctive merchandise. The robust omnichannel shopping experience was solid as well.

Especially in light of the questionable macro-economic environment and poor weather conditions in some States, Macy's is happy with its performance.

Note that Macy's is scheduled to release its fourth quarter results on the 25th of February. Comparable sales are now seen between 2.8 and 2.9% for the second half of 2013, a much narrower outlook than the previous guidance of 2.5 to 4%. Fourth quarter comparable sales are seen up by 2.3 to 2.5%.

Macy's continues to see full year earnings between $3.80 and $3.90 per share, excluding charges related to the cost reduction efforts. More positive news, Macy's expects to forego a $150 million pension contribution in the quarter, thanks to better than expected market returns.

Looking Into 2014

For the upcoming fiscal year of 2014, Macy's sees comparable sales growth of 2.5 to 3%, which should push earnings per share towards $4.40-$4.50 per share.

The outlook is quite upbeat and the strong jump in earnings comfortably beats consensus estimates for earnings of $3.87 per share.

Increased Focus On Profitability

Despite the solid sales results, Macy's continues to focus on costs to drive earnings growth further. Macy's will focus on cost reductions which include organizational changes in an effort to save $100 million per annum going forwards, starting in 2014.

Macy's has set "a culture of growth" starting five years ago with new strategies which were untested by any other national retailer in this scope and scale. Ever since, sales and earnings have grown significantly.

Despite the success, Macy's continues its focus on effectiveness. To achieve these cost cuts, Macy's is incurring an estimated $120-$135 million in charges during the fourth quarter. Note that $50 to $55 million of these charges are of a non-cash nature, not resulting in cash outlays for the company.

These changes are the result of earnings from the implementation of new business strategies and technologies. The Midwest and North Region will be combined, reducing the number of regions to 7, while the number of districts will be reduced from 69 to 60. Other examples include the elimination of the district planner role for soft home categories, as these sales are less subject to locations making this a national task.

Further job cuts are seen at some Macy stores as well as central office, administrative and back office jobs throughout the company. In total some 2,500 workers are expected to lose their jobs as a result of these changes, while many others could be reassigned. While the number is huge, don't forget that the company employs about 175,000 workers. While Macy's expects that 2,500 workers will lose their jobs new jobs at the internet activities will offset most of these job losses.

Note that Macy's has hundreds of stores which help to fill online orders, making it very competitive to other brick-and-mortar retailers.


Heading into the financial crisis, Macy's was already in trouble. Comparable store sales started to fall in 2007, with negative sales growth accelerating towards 4-5% in 2008 and 2009. The initiatives taken by the company have resulted in 3-5% comparable sales growth in the period 2010-2012. As a result, revenues have risen by nearly 20% between 2009 and 2012. Earnings have risen sharply as well in this time period.

Shares have risen from just $7 in 2009 to current all time highs of $55 on the back of the latest announcements. This values the company at about $20 billion. The company has access to $1.2 billion in liquidity, resulting in a net debt position of around $6 billion.

Macy's is on track to generate revenues of $28 to $28.5 billion or the year, while reporting earnings of around $1.4 billion. This values equity in the firm at 0.7 times annual revenues and 14-15 times annual earnings.

Macy's quarterly dividend of $0.25 per share, provides investors with a yield of 1.8%.

Takeaway For Investors

The timing of the renewed cost initiatives is remarkable, as Macy's is cutting costs while business appears to be booming based on the initiatives from the past few years.

I guess investors like the fact that management keeps a razor sharp eye on costs, even during the good times. Typically many companies are not so pro-active in such cost measures, laying people off in the harsh times.

With earnings seen at $4.40 per share next year, a multiple of 15 times earnings might not be out of reach if the market continues to re-evaluate Macy's strong performance. This would translate into an earnings target of around $65 per share, making the stock appealing even at these higher levels.

The initiation of a dividend and multiple hikes to $0.25 per quarter in recent years provides investors with some nice income at the moment as well. The relatively low payout ratio of about 25% leaves more room for further hikes.

I remain cautiously optimistic about Macy's prospects.

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.