Give Yourself The Gift Of Returns With This Iconic Retailer - Macy's Inc.

| About: Macy's Inc. (M)
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Summary

Some Retailers are failing while others are thriving. Stick with the ones in the latter category.

Macy’s Inc. is dedicated to growing its online sales and distribution model as well as improving its bricks-and-mortar location performance.

Income seekers will be pleased with the steadiness of 2% dividend and its financial soundness.

The Situation

Just in time for the holidays, one nationally recognized retail chain should be on your holiday income stock shopping list. That company is Macy's Inc. (NYSE: M). If you are looking for yield and stability with the potential for future capital gains, then this 184-year-old retailer is a solid pick.

This year, retailers are receiving a mixed bag of opinions from analysts. Depending on who you listen to, it is a toss-up regarding the viability of the American consumer to support the growth forecasted by government Economists. Some say retail is in decline, while others say it is booming. Still others think e-commerce is killing brick-and-mortar stores and that anyone with a physical store is doomed to future of store closing and failure.

Well, the good news is that you can ignore all that chatter and just stick to buying shares in an iconic brand name retailer that has sound financials and is taking advantage of the latest in omnichannel commerce opportunities. The secret to retail success in today's web-driven world is to either offer local services that require a consumer to be there in person or to diversify your business through both brick-and-mortars as well as online store sales and expedited delivery options (like next day or free shipping).

Macy's Inc. is an excellent addition to your portfolio. After you spend just about all your paycheck on gifts for friends and family, be sure to leave a little extra cash for yourself so you can buy this dominant retailer and start earning some solid income. You will need it when those credit card bills arrive in the mail next month!

The Business

Macy's Incorporated is one of the most recognized major department store brands in the United States. It is headquartered in Cincinnati, Ohio and is considered part of the Services sector of the public markets. The company, formerly known as Federated Department Stores, Inc., was founded in 1830 but changed its name to Macy's in 2007. It also operates the department store Bloomingdale's Outlet. In total, the company currently has 172,500 full-time employees.

Through its subsidiaries, the department store giant operates brick-and-mortar as well as online stores in the United States and related territories. It sells a wide range of merchandise including, but not limited to: apparel and accessories for men/women/children; cosmetics; home furnishings; and other general consumer goods.

As of the most recent SEC filing, the company operates roughly 840 stores carrying the Macy's or Bloomingdale's name in 45 U.S. states/territories, two websites and 13 Bloomingdale's Outlet stores.

The Numbers

Right off the bat, we like Macy's for its reliable dividend, which is right around 2% based on trailing-twelve months of SEC filings. Plus, they have increased their dividend for the past 3 years at an annualized growth rate of 18.7% per year.

Next, Macy's sports a solid 40% gross profit margin and a 10% operating margin. It boasts a Return-on-Equity (ROE) of nearly 30%, which is a hallmark of a well-run business. Over the past 5-years, its average Return-on-Assets (ROA) was 5.5%. One of our favorite metrics, the stockholder yield, currently stands at 8.3%, which generally translates into more money in your pocket over the long term after taking into account dividends, share buybacks and paying down debt.

Let's take a look at some financial metrics for Macy's:

(Below based on trailing-twelve months of quarterly SEC filings)

Market Cap: $21.411 Billion
Gross Profit Margin: 40.1%
Net Profit Margin: 5.5%
Return on Equity: 28.9%
Dividend Yield: 1.9%
Stockholder Yield: 8.3%
Payout Ratio of Cash Flow: 16.2%

Price-to-Earnings: 13.87
Price-to-Book: 4.00
Price-to-Sales: 0.77

Price-to-Cash Flow: 8.54
Current Ratio: 1.37
Debt-to-Equity: 3.19
Debt/Assets: 0.76
Enterprise Value/EBITDA: 7.17

What really attracted us to Macy's was that it not only meets our brand test and financial soundness check, but unlike many blue-chip stocks out there, it is trading at a very attractive valuation. With a Price-to-Earnings multiple of 13.87 and a Price-to-Cash Flow ratio of just 8.54, we feel that you can do very well with Macy's over the medium to long-term.

Its dividend payout ratio is just 16.2% of cash flow, which gives us some safety in terms of Macy's ability to continue paying its dividend going forward. A Current Ratio of 1.37 tells us Macy's has enough liquid assets that it can easily cover its near-term obligations. Additionally, it trades for just 0.77 times sales and an Enterprise Value-to-EBITDA of just 7.17.

The Competition

Macy's competition primarily consists of J.C. Penny (NYSE:JCP), Dillard's (NYSE:DDS), Sears (NASDAQ:SHLD), Kohl's (NYSE:KSS), Belk (OTCPK:BLKIB) and Nordstrom (NYSE:JWN). Sears and JC Penny have been hit hard over the past year due to sluggish sales and declining foot traffic numbers. Each is down roughly 30% on a year-over-year basis. Meanwhile, Dillard's and Nordstrom have maintained a strong presence, each showing double digit positive share price appreciation over the past year.

From a valuation standpoint, Macy's is on par with the industry in terms of Price-to-Sales and Price-to-Earnings. What sets Macy's apart from the pack is its high Return-On-Equity and steady dividend payment. Also, at around 10%, it claims one of the industry's highest operating margins. This is a crucial metric in retail to ensure that net margins stay in the black.

Additionally, Macy's holds an iconic brand name that the competition cannot fully measure up against. Just look at the beloved tradition of the Macy's Thanksgiving Day Parade in New York City every November. We don't see it changing to become the Dillard's Thanksgiving Day Parade any time soon.

The closest competitor is Nordstrom, which operates very similarly to Macy's and has figured out how to leverage the disappearing middle class by offering discounted merchandise through its Nordstrom Rack brand. However, Nordstrom trades a higher P/E and P/S ratio than Macy's. Since we're all about the brand, we feel you are better suited to stick with the household name on this one.

The Future & Risk

While Retail in general has been a seesaw of news lately, Macy's continues to generate huge cash flows and return that cash to shareholders in the form of dividends. The primary risks to Macy's are in the weak economic recovery, particularly among the middle class shopper. While Macy's tends to target the more affluent consumer in some markets, there are plenty markets where it serves the middle as well.

Going forward, sales are expected to grow at a modest 2%-3% and margins should continue to hover around 10%, which is a solid performance. Same store sales are relatively flat, with a 0.7% decrease being reported in the most recent quarterly filings as of November 2014.

Macy's bright spot remains its dedication to making the omnichannel operating model work. Over the long term, this should result in Macy's continuing to provide solid returns and keeping it among the industry leaders.

An important metric to watch is Macy's debt levels. Retail is very capital intensive in terms of requiring inventories and maintaining physical real property locations. Higher debt levels in retail are par for the course. However, it is important to be mindful of significant increases in net borrowing activity going forward.

This could signal trouble ahead, which would be a legitimate cause for concern. Over the past four quarters, Macy's has borrowed to the tune of $109 million. However, over the past five fiscal years, it has decreased its long-term debt obligation by $1.7 billion.

The Takeaway

If you need to generate yield and want to diversify your portfolio by having some exposure to the slowly growing U.S. economy, then adding shares of Macy's to your portfolio is a good bet.

At a Price-to-Earnings ratio of just under 14, it trades well below the current S&P 500 P/E of 19.27. With an enormous Return-on-Equity of 28.9%, a steady dividend of around 2% and a stockholder yield of 8.3%, Macy's is poised to give you the gift that keeps on giving all year around…a nice return!

Use the recent market weakness as an entry point. To limit your downside risk, do not put more than 5% of your portfolio into this position. Given all the uncertainty around retailers and whether or not the U.S. consumer is back, it bodes well for you to own shares of a dominant, brand name retailer with locations in key markets and a management team dedicated to growing its omnichannel business model. Buy Macy's today.

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.