Macy's Is as Good as It Gets

 | May 14, 2014 | 1:00 PM EDT
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First-quarter retail earnings have kicked off and investors seem to be willing to look way beyond the weather and Easter Bunny issues and hoping for a better second half of the year. I call this the "Retail Zombie Second-Half Syndrome."

We have heard these stories year after year, particularly in the never-ending bloated inventory teen space. The great news for retailers this year is the weather blame game in the first quarter (which was legit in many cases) is giving investors yet another reason to believe.

The problem is that all retailers are not created equal in the Second-Half Zombie Syndrome Game; however, there are a few retailers that are worth the second-half investment story. Look no further than the Macy's (M) report this morning. While sales were about 3% below expectations and comps decreased 1.6%, year-over-year margins increased.

Yes, let me repeat: There is a retailer that has so much influence over vendors it has the ability to maintain/increase profit margins even when the weather and the Easter Bunny are working against us. Despite a first-quarter sales miss, Macy's suggested that April improved and confidence that the first quarter was just a blip resulted in reaffirmed guidance of 2.5%-3% comps for the year. And then management threw in a 25% increase in the dividend and an increase in buyback plans.

Of course, Macy's is not invincible. The retailer ended the quarter with inventories up 4.7%, year-over-year. With comp plans of 2.5%-3%, we could certainly find fault with that less-than-perfect spread. However, based on Macy's track record of using its muscle to manage its margins, this second-half story is as good as it gets.

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