A Shopping Trip to Macy's

 | May 13, 2014 | 11:30 AM EDT
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Macy's (M) reports first quarter fiscal 2015 earnings on Wednesday before the market open. After a tough March and an okay April, I believe expectations for the quarter are pretty low. I believe investors will ignore this quarter's results and look forward to the back half of the year

For all the retailers I follow, the first quarter was really tough. All across the country weather impacted sales. Cold, rain, you name it. March was a disaster for almost everyone but sales seemed to have picked up in April. All the retailers that missed March, beat expectations in April.

March was a five-week month that included spring break, Mardi Gras and St Patrick's Day. Easter was late this year and was pushed back to April 20. I'd say the quarter was a wash.

With over 840 stores, I don't think Macy's escaped the drama. That said, in the last three months, Macy's stock has outperformed the S&P 500. Analysts expect Macy's to earn $0.59, up from $0.55 in the year ago period and revenue to rise just 1.09% to $6.47 billion.

The second quarter looks better, since it ends in July and includes back-to-school. Revenue is expected to climb 3.5% to $6.27 billion. The second quarter is the highest margin quarter. Gross margin should climb from 30.64% in the first quarter to 41.7%. For the year, gross margin levels out at 40%.

Investors are looking for revenue of $28.6 billion and $4.48 in earnings per share for fiscal 2015. For the one-year period ending Monday, Macy's shares are up 22%. Over the next year, with the help of expense control, Macy's should be able to boost operating margins from 9.9% to 10.5%.

With higher operating margins, Macy's will be able to generate strong free cash flow. Many analysts expect the company to use that strong free cash flow for a significant stock buyback.

Because of its strong operations, the company has earned a premium stock multiple. If you use 15x next year's estimate of $5.13, you get an implied price target in the mid $70s.

I think there is plenty of time to go shopping. I would look to build a Macy's position on a pullback.

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