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Macy’s Still Waiting for Parade

By Igor Greenwald on March 1, 2013

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Consumers no longer live in fear for their jobs, but that only leaves them more time to worry about making it to the next paycheck.

Higher payroll taxes, government spending cuts and rising gas prices have largely swallowed up the modest income gains from job growth and mortgage refinancing.

Adjusted for inflation, disposable personal income rose all of 1.5% last year, and more than half of that will be clawed back this year via the payroll tax hike.  

The austerity has hit the retail sector hard across all demographics. Wal-Mart (WMT) recently blamed  “current economic factors that are affecting customers in many of our markets” for its disappointing guidance, shortly after one of its executives called February sales “a total disaster.”

JCPenney (NYSE: JCP) is a ghost town and a dead chain walking after losing a quarter of its sales last year under an ill-starred turnaround plan, though admittedly a lot of its wounds were self-inflicted.

Even Coach (NYSE: COH) is blaming its growth slowdown on “a muted macroeconomic environment,” while Tiffany (TIF) rues “uncertainty about general economic conditions in all our major markets.”

Which makes it all the more remarkable that the economy, the fragile state of the consumer and all that jazz came up not even once in Macy’s (M) recent conference call, nor in the release announcing its fourth-quarter earnings. More remarkably still, those earnings comfortably exceeded expectations raised by an upside preannouncement earlier in the month.

Cash flow from operations rose 8 percent last year, while sales increased 4.9 percent. Fourth-quarter same-store sales jumped 3.9 percent, driven almost entirely by a 48 percent leap in online commerce.

The retailer offered a bullish forecast for 2013, projecting a 3.5 percent increase in comparable sales and a 13% rise in earnings per share.

Last year, Macy’s invested 38 percent of its operating cash flow in its business and spent the rest on share buybacks, with more of the same in store for this year. The company also used cash on its balance sheet to pay down $800 million in debt and pay out $324 million in dividends (the stock currently yields 2 percent.)

Why has Macy’s been so successful while rivals have stumbled? The retailer credits MOM. That’s management-speak for initiatives known as My Macy’s, omnichannel and MAGIC Selling, which is, inevitably, itself an acronym.

In brief, My Macy’s stocks merchandise in stores based on local demographics, with custom strategies for “warm-weather,” “Latinos” and “extreme-growth,” for example.

Omnichannel seeks to erase the distinction between bricks-and-mortar and online sales, with stores servings as showrooms, warehouses and pickup locations for Internet and mobile shoppers. This is what’s driving the surge in Macy’s web commerce from a low base.

Finally, MAGIC Selling seeks to improve customer service and salesmanship by bumping up training for new associates from a 90-minute interactive video in a booth to a three-and-a-half-hour training session with instructor. Employees are encouraged to Meet and make a connection; Ask questions and listen; Give options and advice; Inspire to buy; and Celebrate the purchase, all while acting perfectly natural.

The strong and increasingly consistent comp sales gains suggest the acronyms may be working as advertised. Of course, the fact that JC Penney lost $4 billion in sales last year didn’t hurt, with Macy’s likely garnering a good chunk of that money.

In any case, the company hasn’t had any trouble getting shoppers to swallow price increases. Average Unit Retail (AUR), the average price of items sold, was up 4 percent year-over-year in the fourth quarter, and Macy’s plans to exact a similar increase this year.

That’s hardly good news for Macy’s shoppers but should be gospel to company investors, signaling a strong competitive position and the wherewithal to overcome the economic headwinds.

It’s hard to recommend buying equities just now with the economy still muddling through and the stock market seemingly in the process of carving out a near-term top. But with a stock selling at 10 times earnings that are still growing at a double-digit rate, it’s harder not to pull the trigger.

Igor Greenwald is an investment analyst with The Energy Strategist.

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