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The holiday shopping season proved profitable for Macy's (NYSE:M) as the company's comparable sales, along with comparable sales from departments licensed to third parties, rose by 4.3%. The company's sales received a boost mainly due to its omni-channel approach which effectively served customers. By using this approach, Macy's was also able to capture some of the store traffic which was lost due to colder weather in the Southern and the Northern regions. This positive comparable store sales growth will add considerable growth to the company's full year 2013 revenues.

The successful execution of My Macy's localization, Omnichannel and MAGIC selling "M.O.M." strategies also added growth to the company's revenues during the first three quarter. The revenues in this period grew by 3.3% compared to the first three quarters of FY12.On a comparable basis net sales were up 2.1%. For full year 2013, Macy's management expects the sales to grow by 2.2% to 2.3%, compared to 2012's full year sales.

For 2014, I expect that Macy's sales will rise by a considerable amount compared to 2013's sales as the overall economic growth is predicted to recover in the U.S. The retail sales in 2014 are projected to grow between 5.2% and 5.7%. On the back of improving macroeconomic conditions, the analysts at Goldman Sachs also expect stronger discretionary spending to drive accelerating and above-consensus comparable sales. This should then result in additional growth to Macy's top line in 2014. The company's management expects sales to grow by 2.5% to 3% in 2014 compared to 2013's levels.

Cost Reduction Initiatives

Backing the profitable growth in the top line, Macy's intends to implement focused cost reductions, including organizational changes, which will help sustain the current growth for the years ahead. Under this plan, the company would combine the Midwest region with the Northern region, creating a new North Central region and reduce the ongoing number of regions from eight to seven. The changes also include eliminating the district planner role for soft home categories, trimming certain central office, administrative and back-of-the-house expenses across the company and realigning, combining and reducing some positions in the stores. It is expected that under this plan approximately 2,500 employees will be laid off (an average of three employees per store).

Through this cost reduction initiative, Macy's will be saving approximately $100 million per year projected to begin from 2014. These savings will add $0.18 per share to the company's earnings thus improving shareholders' returns.

The cost reduction strategy will further improve Macy's margins which are already better than the overall industry average. The margins also slightly improved during the first three quarters of FY13 as the company reduced its year-over-year selling, general and administrative expenses and interest expenses. The table below shows the YoY change in the company's margins and its comparison with the industry average.

Despite an improvement in margins and solid revenue growth, I expect Macy's full year net earnings to remain almost the same as 2012's net earnings level due to non-recurring charges that will be added in the fourth quarter 2013 earnings report. The company's management maintains its full year guidance for net earnings to be in the range of $3.80 to $3.90 per diluted share (excluding non-recurring charges).

The charges are related to the implementation of the cost reduction strategies as well as store closings and impairment charges. The charges are estimated to be in the range of $120 million to $135 million, $50 million to $55 million of which is projected to be non-cash. So it is expected that Macy's will not meet the per share earnings guidance provided by its management.

Risks

The analysis above portrays Macy's stock as a perfect investment with no risks attached to it but that's not the case. During the first three quarters of FY13, the company's liquidity position weakened due to an increase in current liabilities compared to the liabilities at the end of FY12. The company's level of debt has also increased during this time period which escalated its debt-to-equity ratio.

By the end of FY12, Macy's current ratio was similar to its industry peers' averages whereas its debt-to-equity ratio was better than the industry average. However, the ratios have since deteriorated compared to the peers' averages. The table above shows that both ratios are depressed compared to the industry.

Valuation

Macy's has the highest quarter-over-quarter per share earnings growth (30.6%) in the industry. All of its peers, except Dillard's (NYSE:DDS), have negative quarter-over-quarter per share earnings growth, which turns the overall industry's price-to-earnings ratio negative. So Macy's stock is clearly better than the industry based on this indicator.

Source: money.msn

The company's price-to-cash flow is clearly inexpensive compared to its competitors as well. The stock is overpriced based on two ratios: price-to-sales and price-to-book ratios but as these ratios are not as refined measures as the other two ratios I gave lower weighting to these two indicators. Therefore the valuation reflects that Macy's stock has an upside potential.

Final Thoughts

The study clearly shows that the Macy's is in good financial health. The company's top line is growing strongly and is expected to continue growing at an even higher rate in 2014.The cost cutting strategies will improve future margins and supporting the revenue growth and eventually enhancing the company's profitability. The increase in the company's future sales and decrease in its costs and expenses would also increase the cash inflows and decrease the cash outflows. This would then improve the company's liquidity position which had deteriorated during the first three quarters of 2013.

The company's valuation also suggests that its stock has an upside potential compared to its competitors who are bearing the pain of negative per share earnings and lower growth in the operating cash flows. Therefore I would recommend buying the stock.

Source: Macy's Is Offering A Decent Upside Potential