In today’s Daily Alert, Dow Theory Forecasts Editor Richard Moroney introduces a great all-around stock. The new recommendation is followed by a sell alert from Cabot Benjamin Graham Value Investor.
“Macy’s, Inc.’s (M, NYSE) steady operating momentum over the past three years has translated into rapid dividend growth and impressive share-price appreciation. The stock has gained 43% since we first recommended the retailer in February 2012, versus 25% for the S&P 1500 Index.
“The stock’s trailing price/earnings ratio of 14 is 6% above its five-year average but 11% below the median for S&P 1500 department stores. Five of the retailer’s six Quadrix category scores exceed 75, contributing to an Overall rank of 96. With both sector- specific scores topping 95, Macy’s is a Buy and a Long-Term Buy.
Business Breakdown
“Over the past seven years, Macy’s has culled underperforming locations, trimming its store count by 3%. It currently operates about 840 Macy’s and Bloomingdale’s department stores and outlets.
“Macy’s has grown same-store sales at least 3% in 13 straight quarters, a feat achieved by just five retailers in the S&P 1500. Macy’s has built that track record the right way. Sales consistently rise faster than inventory, while gross profit margins have held up well relative to historical norms.
“Macy’s has improved inventory efficiency in a couple of ways. Its merchandise buyers tailor assortments to fit local tastes at individual stores. Macy’s is also equipping stores to fulfill orders placed online or at nearby locations. About 500 stores are now capable of fulfilling outside orders, up from 292 stores last year and just two stores in 2011.
Amazon.com’s shadow looms over all traditional retailers. But Macy’s claims showrooming — customers checking out merchandise in store and then buying it cheaper online — has yet to become much of a problem. The retailer says more than half of its products are available only through its stores, including private-label items, exclusive brands, and other merchandise with limited distribution runs.
“Steady operating results have allowed Macy’s to focus on its dividend, which has quintupled over the past three years, while using excess cash for stock repurchases.
Since July 2011, Macy’s has sliced 9% off its share count, paying an average price of less than $37 per share. In May, management added $1.5 billion to its buyback plan, which now totals about $2.6 billion, or roughly 14% of outstanding shares at current prices.
Conclusion
“Macy’s expects same-store sales to rise 3.5% this year. The retailer saw weakness among its lower-end shoppers during the April quarter, but the retail environment has flashed signs of improvement since then. Year-over-year mall traffic trended upward in May and June. And with consumer-sentiment indexes at or near five-year highs and job growth fairly steady, more growth is likely in store.
“The housing recovery should also drive gains for Macy’s home products, including furniture, textiles and mattresses. The consensus calls for per-share earnings of $0.79 in the July quarter, implying 18% growth on 3% higher revenue.”
Richard J. Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, 7/15/13