Macy's Makes Us Feel So Young

| About: Macy's Inc. (M)


M is for Millennial; youth must be served -- profitably.

Valuation, dividend attractive.

Competition and relevancy are risks, but marketing muscle is formidable.

As a member of the most resented generation (i.e., boomers), it's hard enough for us to entertain the thought that citizens born in the '90s (i.e., millennials) have the right to vote, much less the ability to dress themselves. "Get over it," we hear you say. "Woodstock was 45 years ago." O tempus fugit, indeed.

Macy's (NYSE: M), however, is pinning much of its hope for the rest of 2014 on helping millennials do that - dress, not vote, we presume. We don't know to what extent it will succeed, but we do think it's the correct path for the department store chain; if youth must be served, 'tis best to take their dough to do it. That may prove problematic, according to a recent story in the New York Times, which asserts the young are more interested in spending on electronic gadgets than fashion. However, "sexting" aside, one is usually clothed when thumbing one's way through the ether.

Regardless, Macy's remains one of our favorite stocks in the retail space, which we think is on the cusp of good times for several reasons, one of the biggest of which is the tax break America is enjoying by virtue of the recent and forecasted decline in gasoline prices.

And the latest snapshot from the International Council of Shopping Centers (ICSC) and Goldman Sachs was salutary. Its weekly Chain Store Sales Index rose a salubrious 4.2% in the week ending Aug. 23 versus the prior year week. On a week-over-week basis, sales were up 0.6%. Michael Niemira, ICSC research consultant, said he expected August sales to show a gain of 4-5%, compared with the 3.6% gain in August 2013.

Macy's stock is currently trading at about 15.5 times earnings on a trailing 12-months basis, below the mean sector PE and at about the middle of its five-year range. Applying a sector multiple of about 17 to the middle of Macy's guidance for this fiscal year, we arrive at a target of $75, some 22% above current levels. While waiting, investors are rewarded with a dividend yielding about 2% at the current share price.

The shares have snapped back nicely after investors initially blanched at the second-quarter earnings miss announced earlier this month. The company said it earned $0.80 per share versus the consensus expectation of $0.86. Gross margins were also disappointing, slipping some 40 basis points, management said, citing the timing of its friends and family promotion as one factor. But the company maintained its full-year earnings guidance of $4.40-4.50 per share, confident in its cost-cutting plan and steady margins going forward.

"We have learned that our success is greatest when we do things big," the droll chief financial officer Karen Hoguet said during the company's conference call with analysts. Examples include "making Macy's America's destination for handbags" and "all we are doing in our business with millennial customers."

In terms of millennials, "our strategies are working well. I am thrilled with the progress in the junior arena [and] the continued very high growth in Impulse, which is the older Millennial," she added.

We consulted our own unscientific focus group of two millennials in New York. The younger cohort said she shopped at Macy's when she was "with Mom or at Christmas," adding that Urban Outfitters and American Apparel were destinations for her and her high school friends. The older member of our group merely shrugged his 25-year-old shoulders. These responses illustrate the risks to Macy's youth strategy - competition and relevance - but we think Macy's marketing muscle makes them surmountable.

One such muscular assault will be staged Sept. 9 when Macy's merchandise will be featured on the CBS live special "Fashion Rocks," which will combine top popular music acts with runway displays of fall fashion at the Barclays Center in trendy Brooklyn. The show will be hosted by Ryan Seacrest, an executive producer of the event, who has an exclusive Macy's line, Ryan Seacrest Distinction. Performers will include Jennifer Lopez, Usher, Pitbull, Miranda Lambert, KISS, Duran Duran, The Band Perry, Rita Ora, Jennifer Hudson, MAGIC!, Nico & Vinz and Afrojack. Outfits that strike a viewer's fancy will be "clickable" for purchase in real time.

Beyond the youth marketing thrust, two other developments are worth noting on the sales front. One is the buy-online, pick-up-in-store option that is in its infancy and has yet to be rolled out in a significant way. And second is a report that Macy's is thinking about outflanking Amazon with a same-day delivery scheme. We think these new connections with customers could be significant.

Macy's Inc. operates stores under the Macy's and Bloomingdale's names in 45 states.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.