There Is Real Value in Macy's

 | Aug 15, 2018 | 12:49 PM EDT
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The market is being a bit harsh to Macy's (M) this morning, with shares down over 14% to $35.86 as of 12:45 p.m. ET. Granted the run-up yesterday on anticipation of monumental second-quarter earnings was a bit premature, but I like what I see here. Unlike many of its rivals, Macy's has done an incredible job of maintaining strong earnings and capital positions despite the tougher retail environment. This second quarter, which some already seem intent to crucify over slow overall sales growth, actually included a lot of good things. Improved full year guidance, and shrinking overall debt make me very happy.

Here is what TheStreet's founder Jim Cramer had to say about Macy's earnings report earlier today. 

The big clunker that no one is going to be happy about (nor am I) is the 1.1% slowdown in revenue year-over-year. Though I would point out that revenue of $5.7 billion actually beat estimates of $5.55 billion. I am disappointed that Q2 sales didn't follow suit of the Q4'17 and the first quarter of this year, but the overall progress for the year is still promising. The big news here is income and earnings. Macy's boosted operating income by 7.4% to $303 million. Thanks to lower interest expenses among other things, net income was up 51.8% year over year to $164 million. That's a pretty good boost if you ask me. With total income attributable to shareholders of $166 million, diluted earnings per share were $0.54 a share; a 50% boost in earnings. 

From a shareholder perspective, this is good stuff folks. Because of the earnings success, Macy's has upped its guidance for the year. The company now expects earnings between $3.95 and $4.15. Conservatively, if Macy's hits $3.95 the stock is trading at 10x forward earnings. That's a pretty good price folks. Macy's is, and remains, a value play.  

Regarding cash flow, the company is operationally sound. The cash outflows are going to a place that I really like; paying off debt. The company repaid $357 million in debt in the second quarter. I'm a huge fan of the company doing anything to lower interest payments, as this impacts their income in a meaningful way that some don't appreciate. To address sales, I think we have a double edged sword here. While overall sales revenues were flat, the company's same store sales actually improved by a mere 0.5%, but that was above expectations. I personally don't see this as a death sentence for the company. They've streamlined their operations in a way that has created profitability that wasn't obtainable a year ago. With full year sales being up 1.1%, the second half will be about the holiday season. Macy's needs a repeat of last year's holiday sales surprise.

I think that will be the next major stepping stone for the stock. We're dealing with a situation similar to car companies. Value is everything. Macy's stock is clearly on par with earnings. To that end, I see a rather boring fall leading into the fourth quarter. Even with the six month rally off of the company's turnaround, this thing hasn't gotten too far past what the company is actually earning. To that end, it makes it a lot easier to see what's going to happen with Macy's. 

My call on the stock

I think the best play here is to look for a pullback low enough to drive that dividend to 4%. If you can get that, you're sitting on a nice yield and waiting for the fourth quarter. This is a buy and hold stock. Investors are jumping right now because the stock ran too much in the last week. The speculation doesn't change the fact that earnings are doing great. I reiterate my stance that this is a real value play; even after the six month run that we've just witnessed. U.S. retail was up strong in July, with sales up 0.5%. That bodes well for the beginning of Macy's third quarter. Unless the economy starts to really tank, I'm not getting to negative on Macy's. There's real estate value, leasing potential, and an improved overall financial performance. 

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