Macy’s Inc.’s analysis versus peers uses the following peer-set: Target Corporation (NYSE:TGT), The TJX Companies, Inc. (NYSE:TJX), Kohl’s Corporation (NYSE:KSS), Nordstrom, Inc. (NYSE:JWN), Sears Holdings Corporation (NASDAQ:SHLD), J.C. Penney Company, Inc. (NYSE:JCP), Dillard’s, Inc. (NYSE:DDS) and Saks Inc (NYSE:SKS). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
| Quarterly (USD million) | 2012-10-31 | 2012-07-31 | 2012-04-30 | 2012-01-31 | 2011-10-31 |
|---|---|---|---|---|---|
| Revenues | 6,075.0 | 6,118.0 | 6,143.0 | 8,724.0 | 5,853.0 |
| Revenue Growth % | (0.7) | (0.4) | (29.6) | 49.1 | (1.4) |
| Net Income | 145.0 | 279.0 | 181.0 | 745.0 | 139.0 |
| Net Income Growth % | (48.0) | 54.1 | (75.7) | 436.0 | (42.3) |
| Net Margin % | 2.4 | 4.6 | 2.9 | 8.5 | 2.4 |
| ROE % (Annualized) | 10.1 | 18.7 | 12.1 | 50.6 | 9.4 |
| ROA % (Annualized) | 2.7 | 5.3 | 3.3 | 13.4 | 2.6 |
Valuation Drivers
Macy’s Inc.’s current Price/Book of 2.8 is about median in its peer group. M-US’s operating performance is higher than the median of its chosen peers (ROE of 23.7% compared to the peer median ROE of 16.0%) but the market does not seem to expect higher growth relative to peers (PE of 12.2 compared to peer median of 14.2) but simply to maintain its relatively high rates of return.
The company’s asset efficiency (asset turns of 1.2x) and net profit margins of 5.0% are both median for its peer group. M-US’s net margin is its highest relative to the last five years and compares to a low of -19.3% in 2009.
Economic Moat
The company enjoys both better than peer median annual revenue growth of 5.6% and better than peer median earnings growth performance 48.3%. M-US currently converts every 1% of change in annual revenue into 8.6% of change in annual reported earnings. We view this company as a leader among its peers.
M-US’s current return on assets is around the same as its peer median (6.1% vs. peer median 6.3%). This recent performance contrasts with its less than peer median return on assets over the past five years (-0.9% vs. peer median 3.2%) suggesting that the company’s relative operating performance is improving.
The company’s comparatively high gross margin of 44.2% versus peer median of 36.5% suggests that it has a differentiated strategy with pricing advantages. However, M-US’s pre-tax margin of 7.9% is around the peer median which, combined with the healthy gross margin, suggests higher operating costs relative to peers.
Growth & Investment Strategy
M-US’s revenues have grown at about the same rate as its peers (2.0% vs. 2.0% respectively for the past three years). Similarly, the stock price implies median long-term growth as its PE ratio is around the peer median of 12.2. The historical performance and long-term growth expectations for the company are largely in sync.
M-US’s annualized rate of change in capital of -1.5% over the past three years is less than its peer median of -0.5%. This below median investment level has also generated a less than peer median return on capital of 6.1% averaged over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.
Earnings Quality
M-US’s net income margin for the last twelve months is around the peer median (5.0% vs. peer median of 4.9%). This average margin combined with a level of accruals that is around peer median (3.7% vs. peer median of 4.2%) suggests there possibly isn’t too much accrual movement flowing into the company’s reported earnings.
M-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.
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Disclaimer
This article was originally written by abha.dawesar, and posted on CapitalCube.
