Macy's Hits High: Why Wait? - Analyst Blog

Macy's, Inc. M is looking promising now and the underlying factors are capable of carrying the momentum further. The stock hit a new 52-week high of $60.19 yesterday and has surged roughly 12% year-to-date, demonstrating its inherent strength. We believe this Zacks Rank #2 (Buy) stock could prove to be a solid bet for investors with long-term earnings growth projection of 13%.

Macy's primary strength is its earnings surprise history. The company had outperformed the Zacks Consensus Estimates in 9 of the past 10 quarters. Looking at its earnings surprise history of the last 4 quarters, this department store retailer has topped the estimate by an average of 6.6%, including an earnings surprise of 6.5% in fourth-quarter fiscal 2013.

Management envisions fiscal 2014 earnings between $4.40 and $4.50 per share. The current Zacks Consensus Estimate for the fiscal year is $4.47.

We believe Macy's sustained focus on price optimization, inventory management, merchandise planning, and private label offering are the primary catalysts driving traffic, facilitating in meeting customer-oriented demand and improving in-store shopping experience.

In an attempt to increase sales, profitability and cash flows, the company has been taking steps such as integration of operations, consolidation of divisions as well as developing e-commerce business and online order fulfillment centers. Going forward, management remained optimistic of capturing sales opportunities with its fresh inventory along with My Macy's localization initiatives, omnichannel integration and Magic Selling. The company has also undertaken certain cost containment initiatives and changes in the organizational structure.

Macy's currently trades at a forward P/E of 13.33x, reflecting a slight premium to the peer group average of 13.22x. Its price-to-book ratio of 3.51x is significantly higher than the peer group average of 2.07x. Given the company's compelling fundamentals, the premium valuation is justified.

Apart from Macy's, other stocks such as Devon Energy Corporation DVN, Foot Locker, Inc. FL and Skechers USA Inc. SKX achieved new 52-week highs of $67.69, $48.16 and $36.95, respectively, yesterday.