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Four Reasons to Buy Macy's, Dillard's, and Sell J.C. Penney

Saturday - 4/13/2013, 1:06pm  ET

The shake-up in traditional retail continues, with the latest chapter unfolding that former Apple executive Ron Johnson has been removed from the top position at J.C. Penney . The anticipated departure comes after a failed strategy to wean J.C. Penney’s customer away from a track record of heavy promotions and discounting. Johnson wanted the listed price to be the final price, consistent with Apple’s strategy of fixed pricing.

Customers responded in earnest by leaving J.C. Penney’s and shopping at competitors such as Macy’s and Kohl’s. Since Ron Johnson became CEO, JCPenney’s stock price has fallen 51%, while shares of Macy’s and Dillard’s have risen 44% and 57% respectively.

How should investors play the retail shake up?

Given Johnson’s failed strategy is out the door, is now the right time to buy the losers and sell the winners, or should investors maintain course?


While market share gains are priced in, here are four reasons why Macy’s is still a buy at 52-week highs:

  • Macy’s continues to make fresh all-time highs in the wake of Johnson’s departure, yet the stock trades at only a 13.3 price-to-earnings ratio. Earnings growth has accelerated at a 12% pace within the last 12 months, the fourth consecutive year of double-digit EPS growth.
  • The company’s omni-channel strategy is paying off, as online sales ( and bloomingdales combined) grew a massive 48.9% in January 2013. In March, Macy’s announced plans to expand its Arizona fulfillment center by more than 50%, a sign of confidence in the online strategy. (Macy’s has since discontinued monthly sales reporting as previously announced following FY12 results.)
  • Macy’s CFO Karen Hoguet recently spoke at Telsey Advisory Group’s Spring Consumer Conference in New York City. Hoguet made clear that she will use excess cash to buyback stock and increase Macy’s quarterly $0.20 dividend (1.80% yield). The CFO also stated she sees continuing benefit in malls where Macy’s competes with J.C. Penney.
  • Analysts at Deutsche Bank raised their price target on Macy’s to $47 from a previous $43 based on market share gains in department stores and acceleration of the online growth strategy.


Dillard’s is a high-end fashion apparel retailer that is positioned between Macy’s and Nordstrom’s level of luxury. Here are four reasons to buy the stock on a recent pullback:

  • Shares fell approximately 10% following record fourth quarter and full year 2012 results on Feb. 25 but have quickly rebounded. The stock has become a momentum play as Dillard’s has experienced consistent earnings growth, gross margin expansion, and 10 consecutive quarters of same-store sales increases.
  • Telsey Advisory group, lead by retail industry veteran Dana Telsey, recommends the purchase of Dillard’s on recent weakness based on exclusive product lines, strong inventory metrics, and proven merchandising initiatives. The company enjoys a loyal customer base and higher margins on private brands such as Antonio Melani and Daniel Cremieux.
  • Analysts at Credit Suisse maintain an Outperform rating and $95 price target on Dillard’s. The high-end retailer is comparable to Macy’s for best-in-class operating efficiency. Dillard’s has market-leading benchmarks on store productivity and inventory management that have lead to its dramatic post-recession turnaround.
  • Dillard’s board of directors recently approved a $250 million share repurchase program effective immediately, which will allow management to repurchase 6.25% of outstanding shares. The share repurchase is also accretive to earnings growth.

J.C. Penney

Here are five reasons why J.C. Penney remains a sell in the wake of Johnson’s departure:

  • The board of directors is endorsing the same executive they dismissed in late 2011/early 2012 for his own failed strategy. Ullman served as Chairman and CEO of JCP through November 2011 and Executive Chairman through January 2012, before activist investor Bill Ackman found a replacement in Johnson.
  • Vendor financing is becoming more constrictive for J.C. Penney, reducing the company’s inventory management ability. Further deterioration in business conditions could have a progressively worse impact.
  • Analysts at UBS reiterated a Sell rating and $10 price target on the embattled retailer following Johnson’s ouster, stating the shake-up confirms the urgent nature of the situation. Investors have little detail on a new turnaround strategy, and Ullman is unlikely to be the permanent CEO.
  • Moody’s reaffirmed J.C. Penney’s near-term earnings will not improve based on a simple management change. The rating agency maintains a negative credit outlook over liquidity concerns.
  • On Apr. 9, the Wall Street Journal reported that same-store sales are down more than 10% quarter-to-date, based on reliable company sources. J.C. Penney has 1 month left in the fiscal first quarter and will report earnings in early May.
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