Macy's - Solid Execution, Fair Valuation And Focus On Shareholder Value

May.14.14 | About: Macy's Inc. (M)

Summary

Macy's executed well in a difficult first quarter.

Management is pro-active in boosting efficiency and investing in omni-channel business.

Increased payouts, fair valuation and full-year outlook makes shares appealing on dips.

Investors in Macy's (NYSE:M) gave a relieved reaction to the company's first quarter earnings report as the company navigated well in the first quarter, confirmed its full year outlook and boosted payouts to its investors.

I remain a buyer on dips.

First Quarter Headlines

Macy's reported first quarter revenues of $6.28 billion, which is down by 1.7% compared to last year. Lower revenues were entirely explained by comparable sales which fell by 1.6%.

Despite the modest decline in sales, Macy's managed to boost operating margins by 30 basis points to 7.1% of total sales. Gross margins rose by 10 basis points to 38.9% of sales, while operating costs fell by 20 basis points.

Reported GAAP earnings came in at $224 million compared to $217 million last year. Earnings per share rose much quicker, up by five cents to $0.60 per share on the back of sizable share repurchases.

Comforting Current Situation

Macy's confirmed that business was soft in January till March with exception of the period surrounding Valentine's Day. April was better, as weather in the Northern parts of the country improved, being a promising sign for the current quarter.

Comparable sales growth in the first quarter was furthermore limited due to an adverse calendar shift of the Friends & Family event and the strong performance in the first quarter of last year.

Despite a difficult first quarter, Macy's reconfirmed its full year outlook. Full year comparable sales are seen up between 2.5% and 3%, while earnings per diluted share are seen between $4.40 and $4.50 per share.

Pleasing Investors

To offset the pain for shareholders after the weaker results, the Board of Directors of the company had some positive surprises for shareholders.

For starters, it raised the quarterly dividend by a quarter to $0.3125 per share, which boosts the dividend yield to 2.2%. On top of this, it hiked the share repurchase authorization by $1.5 billion to $2.5 billion, sufficient to retire roughly 12% of the outstanding share base at current levels.

Valuation

Macy's ended the quarter with $1.9 billion in cash and equivalents while total debt of $7.2 billion results in a net debt position of $5.3 billion.

Trading at $58 per share, the equity of Macy's is valued at around $21 billion. Given that sales could approach $29 billion this year, this values the company's equity at 0.7 times sales and 12-13 times earnings, estimated to come in around $1.65 billion.

Takeaway For Investors

Macy's had a difficult quarter just like any department and retail store chain out there. While a decline in comparable sales seems dramatic, the relative performance is solid. The fact that the company maintains its full-year comparable store sales forecast is therefore comforting.

Another comfort is the fact that the company is managing to boost operating margins despite the drop in sales. The company has been really pro-active in cost-cutting through a restructuring announced at the start of the year in order to save a $100 million per year.

The company relies still heavily on mall traffic, yet Macy's omni-channels are relatively well developed. CFO Hoguest said on the conference call that the e-commerce business was accretive to earnings. The company has made initiatives like ¨buy online, pick up in store¨ to boost sales and make the bridge between brick-and-mortar stores and the online world.

Hoguet furthermore noted that the performance in Southern states was better due to relatively better weather and that the overall consumer was doing ¨OK, but not great."

All in all, I believe that Macy's had an outstanding execution over the past quarter, and the confirmation of the full year guidance is really comforting. The increased payouts to investors, the fair valuation and relatively contained leverage are all positive signs, so is the strong omni-channel position of the chain.

I remain a buyer on dips.

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.