(By Kevin Donovan) One of our New York traditions was a visit to the big store on 34th St. to take in Macy's holiday window displays, unveiled again today, and maybe venture inside to buy a tree ornament and a sweater or two. Dump the Donald all you want if that's your inclination this Christmas season, but we still want to keep the sleigh full of Macy's Inc. (M) shares – and not just for sentimental reasons.
Since our early July buy recommendation (see here), shares of the iconic retailer are up about 19 percent, as the chart below shows:
We're still buyers with a 12-month price target of $50, based on applying a market multiple of about 14 on next year's consensus earnings estimate of $3.82 per share. That represents upside potential of 30 percent, not counting the 2.06 percent dividend yield. Macy's current forward multiple of 10.16 compares with 17.42 for Saks and 12.60 for Dillard's. Saks does not pay a dividend, and Dillard's yield is 0.24 percent.
We think the current uproar over marketing of Donald Trump-branded products is little more than a distraction at worst and attention-drawer at best for Macy's, which heads into the holiday season with the wind at its back despite the recent devastation wrought by a headwind called Sandy.
Inspiring our bullishness on the macro level is our expectation that the more optimistic consumer evident in recent surveys will combine with easy monetary policy and a resolution of the fiscal cliff overhang to increase sales.
On the company level, Macy's is executing at a level that warrants a higher valuation in our view. Significantly, SG&A expense as a percentage of sales in the quarter was 20 basis points below last year. Operating income was $325 million in the quarter, up 12 percent over last year's $291 million. As a percentage of sales, operating income was 5.4 percent, up 40 basis points over last year.
In a conference call with analysts and investors following last week's announcement of results for the third fiscal quarter ending in October, the company raised guidance for fiscal 2012 earnings to $3.35 to $3.40 per diluted share, including fourth quarter earnings guidance of $1.94 to $1.99 per diluted share. Previous 2012 guidance was for earnings of $3.30 to $3.35 per share, and compares to initial guidance of $3.25 to $3.30 per diluted share provided at the beginning of the year.
Previously, the company raised its guidance for same-store sales growth in the second half of 2012 to approximately 4 percent from previous guidance of up approximately 3.7 percent). Implied guidance for same-store sales growth in the fourth quarter is 4.2 percent percent, and 3.9 percent for full-year 2012. This compares with guidance at the beginning of the year for 2012 same-store sales to be up by approximately 3.5 percent.
In sum, we're persuaded to stick with our Macy's call and would increase positions on dips. Those who are more persuaded by momentum should watch the resistance level of about $41. If breached, we expect the stock to march toward our target by year-end 2013.
Macy's, Inc., with corporate offices in Cincinnati and New York, is one of the nation's premier retailers, with fiscal 2011 sales of $26.4 billion. The company operates about 840 department stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy's and Bloomingdale's, as well as the macys.com and bloomingdales.com websites. The company also operates 12 Bloomingdale's Outlet stores.