Options Trade – Macy's, Inc. (NYSE:M) Calls
Monday, February 23, 2015

**OPTIONS TRADE: Buy the M May 2015 65.000 call (M150515C00065000) at or under $2.00, good for the day. Place a protective stop loss at $0.80 and a pre-determined sell at $3.50.

by Ian Harvey

February 23, 2015

Introduction

Macy's, Inc. (NYSE: M), an omni-channel retail company operating 840 stores (as of February 1, 2014) and Internet websites under two brands, Macy’s and Bloomingdale’s, selling a range of merchandise, including apparel and accessories for men, women and children, cosmetics, home furnishings and other consumer goods, will report its Q4 results on February 24. The company will report its quarterly numbers before the market opens, with analysts expecting earnings of $2.42 per share, up from $2.31 during the same period last year. The stock is down 3.4% on the year.

Improvements in the overall economy have helped retailers, as consumer confidence has risen to pre-recession levels. Macy's has done a good job growing its earnings, with earnings climbing 29.8% during the most-recent quarter. Analysts have forecast more earnings growth to come, with EPS rising 14% next year. The stock is currently trading just shy of its all-time high, but even with the stock so close to its record high the valuation continues to look attractive, with a P/E of just slightly above 15.

Macy's stock has rallied 12% over the past 12 months, narrowly topping the S&P 500's 10% gain. The department store chain, which also owns Bloomingdale's, has gradually bounced back since 2011, when its three consecutive years of revenue declines finally bottomed out.

CEO Terry Lundgren is widely credited for getting Macy's back on track by wooing back younger shoppers with specialized brands. Macy's also consistently marketed itself to upscale shoppers, which partially shielded it from the economic downturns that derailed Sears Holdings and J.C. Penney.

Technical Details

Macy's, Inc. has a 52-week low of $52.90 and a 52-week high of $68.30. The stock’s 50-day moving average is $64.93 and its 200-day moving average is $61.22. The company has a market cap of $22.209 billion and a price-to-earnings ratio of 15.40.

Earnings

Macy's last announced its earnings results on Wednesday, November 12th. The company reported $0.61 EPS for the quarter, beating the Thomson Reuters consensus estimate of $0.51 by $0.10. The company had revenue of $6.20 billion for the quarter, compared to the consensus estimate of $6.35 billion.

During the same quarter in the prior year, the company posted $0.47 earnings per share. The company’s quarterly revenue was down 1.3% on a year-over-year basis. On average, analysts predict that Macy's will post $4.34 earnings per share for the current fiscal year.

Better-than-Expected Earnings

Impressive holiday sales numbers, restructuring endeavors and other strategic initiatives make Macy’s optimistic about its fourth-quarter fiscal 2014 performance. As a result, on Feb 3, 2015, management upgraded its earnings guidance for fiscal 2014, which is now expected to lie in the band of $4.35–$4.37 per share, up from its previous guidance of $4.25–$4.35, excluding various one-time items.

Moreover, fourth-quarter comps growth of 2.5%, on an owned and licensed basis, was within the company’s most recent guidance range of 2.5%. This amounts to a 1.4% increase in full-year comps, on an owned and licensed basis. On an owned basis, comps came in at 2%, falling within the company’s projection of 1.9%–2.4% and leading to an advancement of 0.7% in annual comps.

Insider Buying

The Securities and Exchange Commission has divulged in a Form 4 filing that the Chief Human Resources Officer of Macys Inc, Allen William S had purchased shares worth of $37,007 in a transaction dated on February 17, 2015. A total of 585 shares were purchased at a price of $63.26 per share. The information is based on open market trades at the market prices.

Moving Forward

Macy's intends to reinvest the projected savings of $140 million from closures and layoffs back into its e-commerce initiatives.

Over the past few years, Macy's has emphasized an "omnichannel" strategy -- which cohesively blends e-commerce and brick-and-mortar initiatives -- where the two businesses complement each other by synchronizing online and in-store catalogs and using stores as fulfillment centers for online orders.

Since Macy's is blurring the lines between its brick-and-mortar and e-commerce businesses, it no longer reports online sales separately. In fiscal 2013, the last year it reported e-commerce numbers, online sales rose 40% year-over-year and accounted for 11% of its top line. Therefore, decreasing its brick-and-mortar footprint to grow its e-commerce is considered to be a smart forward-thinking move for the company.

Analysts Opinions

Barclays assumed coverage on shares of Macy's in a report issued on Tuesday last week. The firm issued an underweight rating and a $55.00 target price on the stock.

Macy's also received a “BBB” credit rating from analysts at Morningstar. The investment research firm’s “BBB” rating indicates that the company is a moderate default risk. They also gave their stock a two star rating.

The company has been the subject of a number of research reports:-

• 2/10/2015 – Macy's was downgraded by analysts at Vetr from a “buy” rating to a “hold” rating. They now have a $68.33 price target on the stock.

• 2/9/2015 – Macy's had its price target lowered by analysts at JPMorgan Chase & Co. from $70.00 to $68.00. They now have an “overweight” rating on the stock.

• 2/5/2015 – Macy's was downgraded by analysts at Morgan Stanley from an “overweight” rating to an “equal weight” rating. They now have a $70.00 price target on the stock. They noted that the move was a valuation call. They noted that the move was a valuation call.

• 2/2/2015 – Macy's is now covered by analysts at Evercore ISI. They set a “buy” rating on the stock.

• 1/29/2015 – Macy's had its price target lowered by analysts at Mackie from C$20.00 to C$18.00. They now have a “buy” rating on the stock.

• 1/19/2015 – Macy's had its “neutral” rating reaffirmed by analysts at Zacks. They now have a $66.00 price target on the stock.

• 1/9/2015 – Macy's was downgraded by analysts at Northcoast Research from a “buy” rating to a “neutral” rating.

• 1/9/2015 – Macy's had its price target raised by analysts at Deutsche Bank from $69.00 to $72.00. They now have a “buy” rating on the stock.

• 1/9/2015 – Macy's had its price target raised by analysts at Credit Suisse from $60.00 to $68.00. They now have an “outperform” rating on the stock.

• 1/9/2015 – Macy's had its “positive” rating reaffirmed by analysts at Stifel Nicolaus.

• 1/5/2015 – Macy's was downgraded by analysts at Buckingham Research from a “buy” rating to a “neutral” rating.

Analysts at Zacks have given a Neutral rating on Macys, Inc. with a rank of 3. The counter has received an average rating of 2.39 from 13 brokerage firms. 5 analysts have rated the company as a strong buy. The Counter has been rated as hold from 7 Wall Street Analysts. Those sitting on huge profits can book out as 1 analyst has also rated it as a strong sell.

Eight brokerage firm analysts have agreed with the mean estimate for the short term price target of $67.13 in Macys, Inc.. However, the stock price could fluctuate by $ 3.98 from the estimate as it is suggested by the standard deviation reading. The higher estimate has been put at $72 price target with the lower price estimate is calculated at $60

Conclusion

The entire retail sector is trading with a low valuation, but Macy's is more attractive than its peers. For comparison, Dillard's (DDS) has a P/E of 16.4, with earnings forecast to grow at a slower 12% next year. The company already reported a 2.7% increase in same store sales during the crucial November and December months, leading to speculation that its quarterly report will be strong.

Macy’s has evolved as a powerful departmental retailer which has improved its total sales by over $5 billion in the past 5 years by riding on the back of solid fundamentals and talented management personnel. It is believed that Macy’s sustained focus on price optimization, inventory management, merchandise planning, and private label offering are the primary catalysts driving traffic.

Look for an upbeat report, with the company hitting or topping the consensus estimate and the stock moving higher on the news.

Therefore, based on the facts above the following options trade is recommended…..


**OPTIONS TRADE: Buy the M May 2015 65.000 call (M150515C00065000) at or under $2.00, good for the day. Place a protective stop loss at $0.80 and a pre-determined sell at $3.50.



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