Tuesday, September 22, 2009

Macy's (NYSE:M): Upgraded to Buy from Hold at Citigroup; $30 target

Citigroup is out with an upgrade on Macy's (NYSE:M) to a Buy from Hold. New price target stands at $30 (prev. $15)

Citigroup's Take — Following recent proprietary mtgs. with mgmt., they are upgrading M from a Hold to a Buy rating based on: 1) M’s ability to drive the topline as the My Macy’s localization initiative cont. to gain traction; 2) operating margin tailwinds from product cost deflation and Macy’s speed to market initiative, and 3) upside fr. current levels based on $30 price target.

Rationale #1: My Macy’s to Fuel Topline — Citi is encouraged by the consistent, positive early results that Macy’s has reported from its 20 pilot markets since 4Q08, and believe that this localization initiative should lead to improved topline (and margin) trends ahead, particularly beginning in 2010.

Rationale #2: Margin Tailwinds Abound — Macy’s expects benefits from product cost deflation to be greater in ‘10 than in ‘09. Based on Citigoup's proprietary analysis, cost deflation could boost gross margins by 50 bps next year! Also, Macy’s speed to market initiative is underway, and while Macy’s is a small step behind the competition, they view this as an investment positive, as a majority of the benefits are ahead of us.

Rationale #3: Upward EPS Revisions Warranted — Firm's previous EPS estimates and consensus are too low in light of the topline and operating margin drivers discussed above. They also view mgmt’s ‘09 guidance as conservative. As such, they raised their 2009-2011 EPS estimates and target price for M. Lastly, they raised Sept. SSS estimate to (-4) to (-6)%, up from (-5) to (-7)% previously.

As such, Citigroup is raising ther 2009-2011 EPS estimates for Macy’s to reflect:

- More constructive outlook regarding topline and margin benefits from the successful execution of the My Macy’s initiative (benefits begin in 4Q09, biggest impact in 2010);

- Margin tailwinds from product cost deflation (M anticipates more of a benefit in 2010 than this year); and

- Improved sales, margins, and inventory turns from the company’s speed to market initiative and product lifecycle management technology rollout (benefits begin in 2009 and should continue in out years).

They are raising 2009 EPS estimate to $1.30 per diluted share, up from $0.97 previously. The upwardly revised estimate is significantly above Macy’s guidance of $0.70 to $0.80, and above current consensus of $0.91 per diluted share. Raising 2010 EPS estimate to $1.80 per diluted share, up from $1.19 previously and above current consensus of $1.20.

September SSS Estimate Revision (details)
Citigroup is raising September SSS estimate for Macy’s to the range of (-4) to (-6)%, up from (-5) to (-7)% previously, and vs. (-6.6)% last year. Recall, management does not provide monthly SSS guidance, but expects SSS in the back half of 2009 to decline (-5) to (-6)%. Citi believes that Macy’s promotional calendar is a slight positive YOY, as the company’s Labor Day Sale shifted from August Week 4 to September Week 1 last year into September Weeks 1-2 this year. They also note that Macy’s has slightly higher geographic exposure to the Northeast region (~22% of the store base vs. JCP at 14% and Kohl’s at 18%), so that later school start dates this year in many districts was likely more pronounced and favorable for the company this month (shifted sales from August into September).

Notablecalls: Macy's suddenly has a lot going for it:

- Note that Buckingham Research was out upgrading Macy's to a Strong Buy yesterday.

- Citi's price target looks like the new Street high; Previous high seems to have been $24.

- There's a nice qualitative part to the call. That's something rarely seen when it comes to Citigroup research.

- The chart looks OK; Short interest stands at around 9% of float. Should add some fuel to the fire.

All in all, I think M can do at least 5% upside here. I would not rule out a 6-7% over the day if the market continues to hold.

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