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Growth & Income

In spite of the macroeconomic headwinds, shares of Macy’s Inc. (M - Analyst Report) have been in an upward trend since delivering its second-quarter fiscal 2012 results; the ninth straight quarter with a positive earnings surprise. The stock price is now hovering close to its 52-week high of $42.17, achieved on May 2, 2012.

With a long-term earnings growth projection of 10.4% and a dividend yield of 2%, this Zacks #2 Rank (Buy) offers a lucrative option for investors seeking both growth and income.

Macy’s Beats, Ups Outlook

On August 8, 2012, Macy’s posted second-quarter fiscal 2012 earnings of 67 cents per share, which came in ahead of the Zacks Consensus Estimate of 64 cents by 4.7% and the year-ago earnings of 55 cents by 22%. Quarterly results were boosted by My Macy's localization initiatives, omnichannel integration, robust online sales and effective cost management.

Management now projects fiscal 2012 earnings between $3.30 and $3.35, up from the earlier range of $3.25 to $3.30.

Total sales grew 3% year-over-year to $6,118 million, beating the Zacks Consensus Estimate of $6,100 million. Comparable-store sales climbed 3%. Online sales, which include sales from macys.com and bloomingdales.com, surged 36.1%.

Gross profit climbed 3.3% to $2,563 million, aided by top-line growth, whereas gross profit margin expanded 10 basis points to 41.9%. Operating income jumped 9.5% to $554 million, whereas operating margin increased 60 basis points to 9.1%.

Earnings Momentum Climbing

The Zacks Consensus Estimate for fiscal 2012 inched up 1.2% to $3.38 per share over the last 60 days, implying year-over-year growth of 17.4%. The current estimate is above the high-end of the company’s guidance range.

For fiscal 2013, the Zacks Consensus Estimate is $3.85 per share, increasing approximately 1.9% over the same time frame, and marking a year-over-year growth of 13.7%.

Dividend Portraying Strength

Macy’s has been actively managing its cash flows and returning much of its free cash to shareholders via dividends, while maintaining a healthy balance sheet and credit ratios that are necessary for an investment-grade rating. The quarterly dividend was doubled to 20 cents per share in January 2012, which currently yields 2%. Over the years, the company has steadily increased its dividend payout. Macy’s commitment toward enhancing shareholder returns reflects its sound liquidity position and well defined future prospects.

A Look at Valuation

Macy’s currently trades at a forward P/E of 11.60x, reflecting an 11% discount to the peer group average of 13.03x. However, its price-to-book ratio of 2.75 is at a substantial premium to the peer group average of 1.99. Given the long-term earnings growth projection of 10.4%, the PEG ratio comes in at 1.1. This is marginally above the benchmark of 1 for a fairly priced stock, but below the industry average of 3.5. The return on equity (ROE) for the stock looks very impressive. It has a trailing 12-month ROE of 22.4% compared with 9.4% for its peer group.

A Look at the Chart

After witnessing volatility in the past, the stock price has now started to correlate with the increasing trend in estimates. The year-to-date return for the stock is 21.9% compared with the S&P 500’s return of 12.5%.

Given the earnings growth potential, the string of positive earnings surprises and the ability to sustain dividend increases; the stock has enough ingredients to lure investors. Macy’s sound fundamentals across its Macy’s and Bloomingdale’s businesses are mirrored through strong second quarter results. Management believes that it will sustain this rhythm in 2012, as the year presents enormous opportunity to enhance market share. The company continues to focus on price optimization, inventory management and merchandise.

Founded in 1820 and based in Cincinnati, Ohio, with an additional office in New York, Macy’s is one of the leading department store retailers in the United States. The company, through its retail stores and Internet websites (macys.com and bloomingdales.com), trades in a wide range of merchandises that include men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods in 45 states, the District of Columbia, Guam and Puerto Rico. The company currently operates approximately 840 department stores. Macy’s has a market cap of $15.79 billion, and competes with J. C. Penney Company Inc. (JCP) and Dillard’s Inc. (DDS).


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