Investing In Macy's Amounts To A Free Option On Economic Growth

| About: Macy's Inc. (M)
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Macy’s (NYSE:M) is a department store and operator and internet retailer with approximately 850 stores in 45 states, the District of Columbia, Guam and Puerto Rico, under the names Macy’s and Bloomingdale’s, as well as and

On September 1 retailers released August same-store sales numbers, and Macy’s knocked the cover off the ball yet again. Macy’s reported August sales growth of 5.0% versus an estimate of 4.2%, despite having 100 stores closed this past Saturday because of Hurricane Irene. In their press release the company estimated that the hurricane impacted same-store sales by 1.5%. Frankly, Macy’s crushed the estimate. But for the hurricane-related store closings, the company would have had same-store sales growth of 6.5%. In addition, Macy's announced it has begun using excess cash to repurchase shares. While the magnitude of the 930,000 shares repurchased in August is immaterial, this is a very important milestone for the company. This year Macy’s achieved an investment-grade credit rating, which has allowed it to increase the dividend and re-start the share repurchase machine.

Macy’s was impacted by the general market sell-off in July and August. The stock fell 15% from July 25 through August 31, including a 10.1% decline in August. Despite announcing sale-store sales growth of 5% for July, the stock declined in August as fear gripped the market and sentiment tilted toward the expectation of a new recession. But make no mistake: Macy’s is a much different company than it was heading into the great recession of 2008-2009. From an operational perspective, My Macy’s and Omnichannel are working, as evident in the sale-store sales results. The company also has an investment-grade balance sheet with over $1 billion in cash. Further, over the last 12 months Macy’s generated $1.2 billion in free cash flow, representing a free cash flow yield of over 10%. And trading at only 5.3x trailing EBITDA, Macy’s is inexpensive.

Macy’s is a company executing on all cylinders. While another recession would clearly impact consumer spending, Macy’s is gaining market share, which would help mitigate an overall decline in the economy. An investment in Macy’s today fairly values the company in a mild-recession or slow-growth scenario and provides a free option on any growth in the U.S. economy over the balance of 2011 and 2012.

Disclosure: I am long M.