On Wednesday, Macy’s (M) reported excellent third-quarter results. Comparable store sales leapt 3.5% in the quarter, while quarterly earnings jumped 31%, to $0.47 per share. Macy’s continues to execute in its key strategies—My Macy’s localization initiative (which launched across the nation in 2009), Omnichannel integration and Magic Selling (which requires a more rigorous training for new sales associates)—and noted that it saw improvement in the sales trend in every region of the country. Operating income advanced 10.8% from the same period a year ago, as the firm’s operating margin improved to 5.7% from 5.4%. Net cash from operating activities was $819 million and capital spending was $381 million, resulting in free cash flow of $438 million in the period, or about 2.3% of sales.
Looking ahead, the company reiterated its previously-issued guidance, with expectations for comparable sales to advance in the range of 2.5%-4% in the second half of 2013 and 2%-2.9% for the full-year 2013. Earnings for fiscal 2013 are still expected to be in the range of $3.80-$3.90 per diluted share, in-line with our $3.83 per share estimate. Of note, we were pleased to hear that the firm experienced particular strength in October, which we think sets the company up for a nice fourth quarter (holiday season) and early 2014. Macy’s seems to be getting most things right while peers Sears (SHLD) and J.C. Penney (JCP) struggle for relevancy.
Valuentum’s Take
Though seasonality is incorporated into equity prices to a large extent (we know the holiday shopping season can account for 40% of yearly revenue, for example), the 2013 holiday shopping season will be more important than others of recent past, in our view. For one, there are six fewer days between Thanksgiving and Christmas this year, which means competition will be even more intense than usual. We’ll see how profit margins hold up in this environment, but we’re not expecting improved margin performance over last year due to this timing dynamic. Second, J.C. Penney is on the verge of bankruptcy, and if rivals in the ‘Retail – Multiline’ industry promote aggressively this holiday season, it will become increasingly more likely that J.C. Penney won’t be around to see next Christmas in 2014 (outside of Chapter 11 protection). If rivals can collectively force this operator out of business, we would expect near- to intermediate-term performance to be greatly enhanced for the survivors. As for Macy’s in particular, the company continues to execute well, but we’re not looking to add it to the portfolio of our Best Ideas Newsletter at this time; the stock is trading within .