Macy's Blows the Competition Out of the Water

Macy's Blows the Competition Out of the Water

On Wednesday, Macy's reported its sales figures for the months of November and December. In response to the news, which illustrated continued growth for one of America's largest retailers, shares of the company traded 5.3% higher after the market closed. With such positive news and an attractive rise in share price, is it possible that investors could still have quite a way to go before realizing fair value or is the company now overbought?

Strong results for the past two months
For the two months profiled in the release, comparable-store sales rose a total of 3.6% in comparison with results for the same two months in the year before. However, when you include results for the company's store-within-a-store concept, in which it sets up and sells merchandise from other name brands, comparable-store sales rose 4.3%.

Looking at the bigger picture, management stated that it believes the company's fourth-quarter results (which include November through January) will come in strong, with comparable-store sales rising between 2.3% and 2.5%. This would imply a full-year growth forecast of 2.2% to 2.3% for sales, which would put revenue around $28.3 billion versus the $27.7 billion reported for the period in the previous year.

In terms of profitability, Macy's believes that its former guidance of $3.80 to $3.90 per share is realistic. Furthermore, despite the difficult macroeconomic environment cited by Terry Lundgren, the company's CEO, the results for 2014 are expected to be even higher.

For the year, management expects comparable-store sales to rise somewhere in the range of 2.5% and 3%. With increased profitability and fewer shares outstanding, Macy's expects earnings per share to rise by between 12.8% and 18.4% and come in at around $4.40 to $4.50.

Macy's has a history of dominance!
While these operating results and future expectations are high, shareholders shouldn't be terribly surprised at the announcement. Even as competitors like J.C. Penney and Kohl's have struggled significantly over the past few years, sales and profits enjoyed by Macy's and its shareholders have gone through the roof.

Over the past four fiscal years, sales at Macy's have risen by 17.9% from $23.5 billion to $27.7 billion. This rise has been the result of an increase in comparable-store sales, partially offset by an 0.7% reduction in store count from 847 locations to 841.

On a net income basis, the picture has been even better. Over the past four fiscal years, net income at Macy's rose an astonishing 305.8% from $329 million to $1.34 billion. This rise in profitability is attributed to better cost controls that have allowed management to keep costs down as a percentage of sales. This is best illustrated by looking at the company's selling, general, and administrative expenses, which fell from 34.3% of sales to 30.6%.

In comparison, other companies have seen mediocre or downright-poor operating results. Take J.C. Penney for instance--using the last four years as a good proxy for long-term performance, we see that the company saw its revenue drop by 26% from $17.6 billion to $13 billion. Most of this decline in J.C. Penney's results took place between 2012 and 2013, when revenue dropped 24.8% in response to a failed attempt by Ron Johnson, the company's now-former CEO, to reinvent the enterprise.

Of course, sales aren't all that matter. Looking at net income, we see even more disastrous results for J.C. Penney. Between shrinking revenue and sticky costs, the company saw its net income fall from $251 million in 2010 to -$985 million in 2013. This, as with sales, can be attributed to the company's falloff in business as consumers became disenfranchised by management's vision of a different kind of shopping experience.

Compared to J.C. Penney, Kohl's looks relatively attractive, but nowhere near as strong as Macy's. Over the past four years, revenue at the retailer rose 12.2% from $17.2 billion to $19.3 billion. In this respect, Kohl's results surpass those of Macy's handily but the company had to pay a price for the sales growth in reduced earnings power.

Despite sales rising so much over such a short time-frame, Kohl's saw its net income rise modestly and then drop again. In fact, between 2010 and 2013, the company reported that its net income grew by only 1.3% from $973 million to $986 million. The disparity between sales and net income growth can be explained by Kohl's cost of goods sold, which rose 15.1% over the past four fiscal years. As of Kohl's most recent quarter, net income fell 17.7% to $177 million from the $215 million the company reported for the same quarter a year ago as sales fell by 1%.

Foolish takeaway
Looking at the financial results posted by Macy's, investors should be cautiously optimistic about the retailer's future. Not only has the company continued to surprise, but it has done so during a time when some of its largest competitors have seen their performances falter. Furthermore, at around 14 times earnings, the company looks almost too good to be true.

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Originally published