Stock Pick: Bad news for Macy's employees may be good news for investors

Macy’s stock has climbed 40% in a year

Macy-s-Inc-M-Adj-Close_chartbuilder (1)

If there’s one U.S. store that most Canadians have likely visited it’s Macy’s, the all-encompassing department store that seems to have a sale on every day. While it may be a great place to buy something on the (relatively) cheap, it’s possible to make some money off the company too.

Over the last 12 months, Macy’s Inc.’s stock (NYSE: M) has climbed by 40%. If its fourth quarter performance can continue into the future, then it’s likely those returns will get even better.

On Feb. 25, it was revealed that the store’s fourth quarter earnings per share came in at $2.31, up 12.7% from the same time last year and beating analyst estimates by $0.14. Net income also climbed by 11% year-over-year. Revenues did decline by 1.6%, but annual profit rose 11% from the year before to $1.5 billion.

Richard Jaffe, an analyst with Stifel, points out that Macy’s results are that much more impressive because retail has been a challenging environment lately.

The company has taken a lot of steps to stay ahead of the game. It’s undergoing a big cost-cutting operation. It’s already closed hundreds of stores and it’s continuing to find ways to save $100 million a year.

It is expected that 1,800 people will be laid off and more store closures are coming. That may sound bad, but Jaffe says it’s good for investors.

“We believe the cost cutting initiative will improve productivity in the organization and will help to drive earnings growth,” he wrote in a Feb. 25 report.

One reason why its equity has climbed is that it’s buying back shares. In 2013, it repurchased 33.6 million shares for $1.6 billion. That should continue.

“We believe continued share repurchase reflects management’s ongoing confidence in the business and its strong cash flow,” writes Jaffe. “We also anticipate the buyback will continue apace as part of management’s ongoing efforts to enhance shareholder value.”

He’s also bullish on the company’s licensing arrangements. It allows other brands, such as Sunglass Hut and Finish Line, to set up shop in its stores, which helps diversify its product lineup and drives people to other parts of the building.

“This strategy is a positive because it enhances the product assortment in stores (better brands and product) with very little risk associated with operating them,” he writes.

Thanks to this, and other initiatives it’s working on, he thinks EPS will grow by 11.25% in 2014 over 2013. The stock is currently trading at $59 a share, but Jaffe predicts it will hit $64 over the next 12 months.