Macy's Highlights Value-Performance Conundrum in Dept. Stores (M, JWN, KSS)

Macy’s Inc. (NYSE: M) is showing just how much of a conundrum there is between today’s retail stock valuations and the reality of what to expect from earnings ahead.  Macy’s had a narrower loss in the last quarter of $35 million, or -$0.08 EPS; but outside of items its earnings were -$0.03 EPS.  Revenues were down over 3% to $5.28 billion. Thomson Reuters had estimates at -$0.07 EPS and $5.25 billion in revenues.    The company did manage solid inventory management controls and its ongoing localized merchandise by region was part of why it raised its sales and earnings guidance for the year.

Still, there are issues between today’s share price versus valuations and where it came up from.  This also highlights issues that lie ahead for Nordstrom Inc. (NYSE: JWN) and Kohl’s Corp. (NYSE: KSS) ahead of their earnings this week.

Macy’s online sales were up 21.1% in Q3 and up 15.6% so far this year.  Same-Store sales were off by about 7.5%.  Macy;s is now targeting a drop of 1% to 2% in same store sales during the crucial fourth quarter, its holiday quarter that makes or breaks the year.  Previously, we had been told to expect a drop of 5%.  That full-year same store sales figure was also narrowed to a range of -5.4% to -5.7% from a prior drop expected at 6% to 8%.  Macy’s expects full-year sales at stores open at least a year to fall between 5.4 percent and 5.7 percent, better than the original forecast of a 6 to 8 percent decline.

There is a problem in this same store sales data.  This shows that the falling off the proverbial cliff seen in the fourth quarter in 2008 is being more heavily influenced this year by a higher unemployment rate.  It also shows that the consumer is going to be very tight-fisted over Christmas.

The full-year guidance was raised to a range of $1.01 to $1.06 EPS.  This is much better than the guidance offered before of $0.70 to $0.80 EPS, but the consensus estimate from Thomson Reuters was already way ahead of the company at a level of $1.11 EPS.

So what about valuations?  Retail stocks were crushed harder in the Q4 period of 2008 than they were in the February and March death spiral seen in financial stocks.  Much of whether you like the valuations of retail stocks depends ultimately on what you feel is a fair normalized earnings capacity for a 2009 to 2010 period.  If Macy’s makes its bottom-line figure of $1.06, then even after a 6% drop to $18.20 today it trades at about 17.1-times this year’s expected earnings.  If it can meet the January-2011 fiscal expectations of $1.44 EPS then it trades at 12.6-times forward earnings.  So a 2009 to 2010 (calendar) blended earnings multiple is close to 15-times normalized earnings.  That is not expensive but it is also far from cheap.

Macy’s has more than tripled off of its 52-week lows from last November.  But shares are also still down by more than half of what they were in 2006 and 2007.  The problem with Macy’s is not its own metrics.  The issue comes down to one where traders and investors are facing a fork in the road.  The market and shares have recovered handily.  At the workforce and consumer level there are under 90 in 100 workers with a job and under 83 in 100 who are fully employed with little to no prospects for real job opportunities in the future.  And many economists and consumers feel that the economic recovery is only temporary and that there will be a double dip recession.

Nordstrom Inc. (NYSE: JWN) is also on deck this week with earnings due tomorrow.  It faces much of the same issues, except that it has recovered even more from its lows as a stock.  It also trades at higher earnings multiples. Kohl’s Corp. (NYSE: KSS) is also on deck for Thursday.  While it has not recovered off of lows as much as Macy’s and Nordstrom, it faces the same valuation issues.

Investors may still buy Macy’s back up after this morning’s drop.  But it is going to take lower prices to drag significant new money off the sidelines at these valuations and after the solid run-up we have witnessed since March.  This also may have set the tone for what to expect from the other mall-based department store players.

JON C. OGG
NOVEMBER 11, 2009