It's time to go shopping—the economic downturn notwithstanding—for shares of the nation's beleaguered retailers, and particularly Macy's.
"I am a big believer in the economic recovery, and from all indications, including the stock market's sharp rise this year, it is definitely on its way," says Larry Haverty, portfolio manager at Gabelli Global Multimedia Trust (GGT), which has been accumulating shares of retailers Macy's (M), JCPenney (JCP), and Kohl's (KSS).
He is aware that everything appears to be going against the group: Consumers have put the brakes on spending as unemployment continues to soar amid the deep economic recession. "Industry fundamentals still appear weak, and many of the wholesalers and retailers will likely struggle over the next several quarters," cautions Matthew Spencer, retail industry analyst at Value Line (VALU), an independent investment research outfit.
Even so, retailers' shares have surged this year, and Haverty believes it's just the beginning of a big move by the group. "This is the time to get in on these shares, which are still selling at attractive prices," says Haverty. The significant upturn in retailers' sales will start showing up in the fourth quarter, he predicts, which he says is already being reflected in the positive behavior of retailing stocks and the market.
Why Macy's Is a Favorite Among the retailers, Macy's is Haverty's top choice. It is one of the largest U.S. mass merchandisers based on annual revenues, with 840 department stores in 45 states under the Macy's and Bloomingdale's names. Macy's "will come out ahead of the pack in the fourth quarter," says Haverty, as sales start reflecting the early signs of an economic recovery.
He believes analysts will soon raise their forecasts for Macy's to adapt to the improved outlook for sales and earnings. And the stock should continue to gain more upward momentum, he adds. Already, Wall Street analysts have begun to turn upbeat on Macy's, with six recommending a buy, 12 rating it a hold, and none advising selling the stock.
Despite the continued general gloomy mood among consumers, shares of Macy's have been displaying positive signs, bouncing from a 52-week low of 5.07 on Nov. 20, 2008, to 14 on Aug. 4. The stock hit a 52-week high of 22.96 on Sept. 9, 2008.
Macy's is still "very cheap" despite the stock's recent jump, says Haverty, who figures it is worth more than 20 based on cash flow and potential strong sales and earnings recovery. The company has "mountains of cash flow," he says, because it has not been opening new stores.
"Solid Traffic" PriceTarget Research, an independent research outfit, gives Macy's its highest buy rating of A, with a price target of 20 based in part on "extremely favorable earnings estimates," and the stock's recent favorable move.
Analyst Liz Dunn of Thomas Weisel Partners (TWPG) rates the retailing industry as neutral but is upbeat nonetheless on Macy's, giving it an overweight recommendation. "During our recent store visits, we noted solid traffic, and our sense is that overall mall traffic has improved," says Dunn. So far, Macy's appears to be managing its inventory well.
She notes that Macy's wasn't expecting revenue improvement in the second quarter, but says she saw "encouraging signs" from the company's My Macy's pilot program, a new initiative in about 400 stores to accelerate same-store sales growth through custom-tailoring of merchandise assortments and marketing programs to the needs of core customers. The stores with the My Macy's program continue to outperform the rest of the store base, notes Dunn, which she says bodes well as the company could now put the strategy in place in all of its stores.
In the first quarter, Macy's outperformed many of its peers in same-store sales, says analyst Jason Asaeda of Standard & Poor's (which, like BusinessWeek, is owned by McGraw-Hill (MHP)), "implying favorable customer response to the company's new apparel and marketing campaign and heightened promotional activity."
Analysts Expect Earnings Rebound Asaeda also believes the company is benefiting from some trading down by consumers from higher-priced department stores such as Nordstrom (JWN). He rates Macy's a hold based on consumers reining in their spending due to financial pressures.
But even analysts who are worried about consumer spending believe Macy's results in 2010 will be much improved from currently low levels. "Earnings may well rebound about 40% in fiscal 2010 [ending on Jan. 31] from this year's likely depressed level," says analyst David R. Cohen of Value Line. He expects Macy's to earn 60¢ a share in 2009 and 85¢ in 2010, down from 2008's $1.29.
Analyst Robert Drbul of Barclays Capital (which owns shares), who rates Macy's equal-weight (neutral), forecasts higher numbers, too. He expects Macy's will earn 67¢ a share in 2009 and $1 a share in 2010. "We expect less pressure on gross margin in 2009, and the company should continue to benefit from expense savings given the recent restructuring," says Drbul.
Apart from the favorable impact of Macy's recently completed restructuring program, which included shutting many underperforming stores, "the retail environment should be healthier by then," says Value Line's Cohen.
Investors like Gabelli's Haverty, who expect the market to increasingly reflect the coming economic recovery, believe that will happen. Investors who don't jump on the retailers' wagon may indeed miss bountiful bargains.