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On Wednesday morning, Macy's (M) reported Q3 earnings per share of 32 cents, which was double the average analyst estimate of 16 cents. This was a major improvement over last year, when adjusted EPS for the seasonally weak Q3 came in at only 8 cents. In spite of the good news, Macy's stock tanked along with the broader market. Macy's shares also may have been weighed down by apparently weak Q4 guidance of $1.52-$1.57 in EPS, below analyst estimates of $1.65.

Macy's fundamentals look great right now. Due to strong debt reduction over the past two years, Macy's regained investment grade status from S&P in May. This allowed the company to repurchase 8.2 million shares of stock during Q3 and has also lowered interest expense. Macy's still expects same-store sales to rise by nearly 5% for the full year. Macy's is outpacing its nearest competitors, such as Kohl's (KSS), which reported solid earnings on Thursday morning, and J.C. Penney (JCP), which reports on Nov. 14. Kohl's same-store sales were up by 2% in the current quarter and will likely be up 2-4% next quarter. Earlier this month, J.C. Penney reported lackluster same-store sales for Q3, posting a 1.6% decline from last year. As I noted in an earlier piece, J.C. Penney is likely to continue to underperform its competitors in the near future, providing an opening for retailers like Macy's.

This data provides strong evidence that Macy's is taking market share from some of its closest competitors. Kohl's and especially Penney's shoppers are taking their business to the somewhat trendier Macy's when they can afford to do so, and staying home otherwise.

The only disappointing news in the Macy's earnings report was that Q4 and full year guidance came in lower than expected. But Macy's management has repeatedly shown a tendency to low-ball sales and earnings guidance this year. In February, Macy's initiated guidance for FY12 at $2.25-$2.30 in EPS. In May, this was raised to a range of $2.40-$2.45. In August, Macy's raised its full year EPS guidance again to $2.60-$2.65. On Wednesday, this was raised once more to $2.70-$2.75. Similarly, in March, Macy's guided same-store sales for the March-April period up 3%, a projection it raised to 4-4.5% in April, and beat in May with same-store sales up 5.3% over the combined period. You get the picture...

All of this demonstrates that Macy's management either has no idea what is happening to the business (unlikely, given that the company is doing a great job at making money in a soft economy) or is deliberately setting easy targets. Extrapolating forward, I expect Macy's to beat its EPS targets once again in Q4.

Management has also indicated that it will increase the rate of share repurchases with the cash flow brought in during the holiday season. These repurchases could be delayed until Q1 of next year, but might begin in December or January. A repurchase program could boost EPS by 5 cents or more.

All in all, there are many reasons to like Macy's. However, the stock now sits near its 52-week high, which it reached earlier this week. Given ongoing weakness in the economy, European sovereign debt concerns, and the impending renewal of the budget debate in the U.S. (the congressional deficit reduction panel is supposed to present its recommendations later this month), it may be wise to wait for a more significant pullback before initiating a new position. If you are investing for the long term (5 years or more), this could be a good time to start building up a position in Macy's. Investors with a shorter time horizon are advised to wait for a possible drop to $27 or $28.

Source: Is Macy's A Buy After Earnings?