By Siyuan Du
Macy’s Inc. struggled with falling sales and slim profits in the first quarter, but analysts see opportunity in the shares.
Since reporting quarterly earnings that fell short of Wall Street estimates and an unexpected 0.7 percent drop in sales last week, shares of the department store retailer have climbed 7 percent to $68.11 at Friday’s close.
Over the past year, Macy’s stock has risen 20.7 percent, compared with a 13.5 percent increase for the Standard & Poor’s 500 index.
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Analysts think Macy’s is a good value for investors because of its more than $10 billion real estate portfolio, off-price growth strategy and low price-to-earnings ratio.
Investors are poised to benefit from the recently announced hike in the dividend from 31.25 cents per share to 36 cents per share. Macy’s also boosted its share repurchase program by $1.5 billion.
The company reported first quarter earnings of 56 cents per share, 6 cents below the Wall Street expectation of 62 cents per share. Sales dropped 0.7 percent, which also missed the Street expectation of a 1.2 percent increase.
It blamed unfavorable weather, West Coast port delays and tourism impact. But Terry J. Lundgren, chairman and CEO, told analysts on the earnings conference call last week that most of the issues were largely behind the company.
One of the key questions in the company’s first quarter conference call is about its attitude towards the real estate portfolio. Michael Binetti, analyst with UBS, wrote in a research that “the stock could be weak if Macy’s doesn’t boost confidence in a (same-store sales) acceleration ahead.” Otherwise, he said the retailer would need to find a way to monetize its real estate assets.
According to Matthew R. Boss, analyst with J.P. Morgan, the company’s current real estate value most likely exceeds its retail worth, which allows Macy’s to maintain control of its “trophy assets” such as Herald Square in New York City. He said the company could sell some of its $10 billion real estate portfolio and use the proceeds to buy back more shares.
Macy’s chief financial officer, Karen Hoguet, told analysts last week that the retailer is looking at “all the possible strategies, and the pros and cons” but that “up until now we haven’t seen an opportunity that makes sense.”
Instead, Macy’s is investing in an off-price strategy, called Macy’s Backstage, similar to those that have worked for other mainstream retailers, such as Nordstrom Inc. The company plans to open four pilot stores in the fall in metro New York City.
“Backstage is a new retail concept that the Macy’s team has built from scratch over the past six months,” said Peter Saches, Macy’s chief innovation and business development officer. “As with all of Macy’s innovations, we will test and learn to see what resonates most with customers so we can adjust before rolling out additional locations.”
The off-price competition between the “Big Three” – TJX Companies, Ross Stores and Burlington Stores – and the department store peers including Macy’s and Nordstrom is heating up. Analysts with J.P. Morgan estimate that because of the competition, it will take less time – 10 years – for the market to get saturated.
“Off-price is a competitive space where there are some strong competitors with very well-built services,” said Paul Swinand, analyst with Morningstar Investment Services. “So I don’t know if in the long run it’s really going to dramatically move a needle on Macy’s sales and earnings. ”
The company’s trailing price-to-earnings ratio is 15.4, below the industry’s level, which is 22.72.
“Right now we’ve gotten it in the range that we see as fairly valued, but it’s trading a little bit over my fair value,” Swinand said.
