Macy’s Inc Coverage Initiated With ‘Outperform’: Cowen

Macy’s, Inc. (NYSE:M) shares are cheap, according to analysts at Cowen and Company, who like the department store chain’s diversified retail exposure. They note that the company has disappointed so far this year because comparable sales have been weaker than expected. However, they say strong fundamentals have helped Macy’s shares outperform this year.

Macy’s expected to boost comparable sales

In their report dated Dec. 16, 2016, analysts Oliver Chen, Steven Zaccone and Courtney Wilson said Macy’s has successfully changed itself into an “omni-channel retailer” by making all of its stores also serve as fulfillment centers. They believe the department store chain sees about 11% to 12% of its total sales from its website.

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Additionally, they believe the company’s mobile strategy to be “well ahead of peers.” They note that Macy’s is already using technology that allows shippers to upload images to its website and locate products that are similar and available for purchase at Macy’

The Cowen team believes the purchase online and pickup in store strategy will drive comparable sales during the holiday quarter. This is because customers may purchase additional items while they’re in the store picking up their online orders.

What Macy’s offers to vendors

The analysts say Macy’s has differentiated itself from other department store chains through product mix and diversification of exposure to the retail market. They note the company has 55% national and 25% exclusive label penetration rates.

They think vendors see Macy’s as offering an advantage over competitors within promotional retail. As a result, Macy’s gets greater purchasing power in terms of securing the best products and preserving margins on its merchandise.

Macy’s offers diversified exposure

The Cowen team said they particularly like how Macy’s has diversified its product mix and addresses different levels of household income. They note that 54% of the company’s products are non-apparel, which sets it apart from other department store chains.

The analysts also point out that Macy’s management has not included improvements in the economy in their projections for 2015. As a result, they think there could be upside to the company’s projections if there is a recovery in consumer spending in 2015. The analysts say better consumer confidence, falling unemployment and lower gas prices could meaningfully benefit sales at Macy’s.

Macy’s rated at Outperform

They initiated coverage of Macy’s with an Outperform rating and price target of $75 per share. The Cowen team says the department store chain’s stock is cheap compared to the 20% long-term growth target for earnings per share.

They say the top risk is limited upside to comparable sales, but they also point out that Macy’s enjoys stable gross margins, controlled selling, general, and administrative expenses, and better execution compared to peers. Shares of Macy’s have climbed 23%, compared to the retail sector’s gain of 6% and the S&P 500 Index’s gain of 12%.