(M - Free Report
) delivered the coveted "triple play" with its latest earnings report. On February 26, the company reported:
- A positive earnings surprise
- A positive sales surprise, and
- Management guidance above the Zacks Consensus Estimate
This prompted analysts to revise their estimates higher for both 2013 and 2014, sending the stock to a Zacks Rank #1 (Strong Buy). Since the Great Recession officially ended in 2009, Macy's has consistently delivered solid same-store sales growth and expanding profit margins, which has led to annual double-digit earnings growth. And analysts expect this trend to continue over the next couple of years.
Despite this, shares trade at just 10.5x 12-month forward earnings, well below the industry median of 14.0x. Tack on a solid 1.9% dividend yield, and this stock looks poised to deliver strong total returns to investors.
Macy's operates about 800 Macy's department stores in 45 states, the District of Columbia, Guam and Puerto Rico. It also owns and operates the Bloomingdale's brand, which has 37 department stores in 11 states.
Solid Q4 Results
On February 26, Macy's delivered strong results for its fiscal 2012 fourth quarter. Sales increased 7.2% to $9.350 billion, which was ahead of the Zacks Consensus Estimate of $9.327 billion. The company benefited from an extra week in the quarter, but if you strip that out, same-store sales on a comparable 13-week period still rose a solid 3.9%. Online sales were particularly strong, rising 48% over the same period last year (online sales are included in the same-store sales calculation).
Meanwhile, adjusted operating income expanded 50 basis points to 14.9% of sales. This led to a 21% increase in adjusted earnings per share for the quarter to $2.05, well ahead of the Zacks Consensus Estimate of $1.98. It was a 21% increase over the same quarter last year.
It was also Macy's 11th consecutive positive earnings surprise - quite an impressive streak for a retailer.
Following the solid Q4 results, management provided 2013 EPS guidance of $3.90-$3.95, which was ahead of consensus at the time. Not surprisingly, this prompted several positive earnings estimate revisions from analysts, sending the stock to a Zacks Rank #1 (Strong Buy).
The two biggest factors in the Zacks Rank are the 'Agreement' and 'Magnitude' of analysts' estimates. And as you can see in the graph below, analysts unanimously raised their estimates off the strong quarter, and it bumped consensus estimates up for both 2013 and 2014 by a decent amount:
Based on current consensus estimates, analysts project 13% EPS growth this year and 12% growth next year. If Macy's can deliver on these projections, it would mark the company's 4th and 5th years of consecutive double-digit EPS growth.
Attractive Valuation, Dividend
Despite the strong growth projections, shares trade at just 10.5x 12-month forward earnings, below its 10-year median of 11.8x and the industry median of 14.0x.
On top of this, Macy's pays a dividend that yields a solid 1.9%. The company generated over $1.5 billion in free cash flow for 2012, which it used to buy back nearly $1.4 billion in stock and pay dividends of more than $300 million. So more dividend hikes may be on the horizon.
The Bottom Line
With strong earnings growth projections, solid earnings momentum, a 1.9% yield and attractive valuation, Macy's offers investors a lot to like.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.