Apparently Macy's (M) third quarter earnings results gave me more hope than it did others. Comparable store sales gained 3.3% while income grew double digits. I wrote earlier in the week that comp sales were the ticket to shares finding momentum. I still believe that to be true despite the volatile reaction this morning. The stock was up premarket but was down over 6% to $33.56 as of 2:15 p.m. ET. Go figure. I partly blame the volatility of the overall market for the cold reception along with the general continued fear of a retail apocalypse. Overall, I think the low valuation of the stock makes its quarterly results quite positive. There's much to be said about the efforts being made in all directions by the company to retain its place in retail.
What I like
Net sales gained 2.3% year over year to $5.4 billion, and credit card revenues increased 27.6% to $185 million. Thanks to management's continued control of costs and sales of (hopefully) unneeded real estate, operating income increased 24.6% to $147 million. Lower debt levels this year have helped lower the company's interest expenses. Interest expense in the third quarter was down 20% year over year to $59 million. I'm a huge fan of liability reduction. The lower interest payments helped drive net income up 129% year over year to $62 million. Diluted earnings doubled to $0.20 per share.
The comparable store sales growth of 3.3% is good. It helps dissuade the negative sentiment that most certainly affected Macy's in Q2 when it reported comp sales growth of 0.5%. I also like what's happening in the digital space. Though I strongly dislike the impracticality of buying clothes online without trying them on, I do understand that e-commerce is here to stay. I was very encouraged to hear Macy's report double digit growth in digital sales. It shows that they can compete with online retailers, a much needed attribute these days.
What I dislike
Macy's Q3 results definitely benefited from real estate sales. It contributed $42 million to operating income, and $0.10 to earnings per diluted share. While selling off underperforming real estate is a perfectly acceptable exercise, it's not a sustainable long-term trend. Therefore I hope to see more of their operating income stem from sales of goods rather than assets in the future.
What I love
Macy's cheap stock price allows it to react more to positive financial performance. If you own Amazon (AMZN) right now, you're playing a game where the company has to produce huge sales gains just to justify the current share pricing. Macy's needs to produce huge sales gains to justify higher share pricing. If this little pullback should continue, I am strongly considering taking a position around $33 if it gets that low; though I'm probably being a little too wishful.
I love the industry dynamics happening around Macy's. The collapse of rivals is providing opportunities for the survivors to rise to dominance. With the Sears (SHLD) bankruptcy and JCPenney (JCP) closing so many stores, there's market share to be taken this holiday season. As strange as it sounds, I think Macy's big competitor now (aside from Amazon) is Kohl's (KSS) . Kohl's has aggressively improved the names it carries, and its earnings this year demonstrate its strength. These two names will be fighting to grab up the market share void being left by Sears, and potentially JCPenney. Nonetheless, I still view Macy's as a strong contender this holiday season.
With full year earnings guidance upgraded, I think management shares my sentiment. With $4.10 per share, the low end of full-year earnings guidance, that gives Macy's a P/E of 8.4 (at the time of writing). When you pair the cheap pricing with the 4.35% dividend yield, this is a hard stock not to own.
