Macy’s promotional strategy may be taking toll on results

Question: I have been impressed with the progress of Macy’s Inc., but do you think it can continue to turn in strong results?

Answer: The famous retailer’s mind-boggling number of sales events and the discount-coupon computations required at its checkout counters raise the question of whether it spends too much on promotions.

Nonetheless, it has made strides in localizing the merchandise assortment in its stores. This reduces the anxiety of existing customers of the store chains it has acquired. It is also benefiting from glitz, as it promotes merchandise of celebrities such as Madonna, Jessica Simpson, Martha Stewart and Rachael Ray.

The company operates about 800 Macy’s stores and 40 Bloomingdale’s stores in the U.S. and Puerto Rico.

It raised its fiscal fourth-quarter forecast and increased seasonal hiring after its November same-store sales rose 6% and early holiday results from stores and Macys.com were strong. That bodes well for a continuation of strong results.

Shares of Macy’s are up 52% this year, putting declines of 2007 and 2008 further into the background.

A profit posted in its fiscal third quarter ended Oct. 30, versus last year’s loss, was attributed to a 24% increase in online sales, a return of well-heeled consumers to stores and localized merchandising.

Consensus Wall Street analyst opinion on Macy’s is “buy,” according to Thomson Reuters, consisting of seven “strong buys,” three “buys” and seven “holds.”

Concerns about investing in Macy’s stock include the cyclical nature of the economy that affects all retailers and the slightly lower average price for Macy’s merchandise in the third quarter. That may indicate that its vigorous promotional efforts are taking a toll on results. It also has a high debt load, which it has been working to reduce.

Macy’s stores sell family clothing, accessories, cosmetics, home furnishings and other consumer goods. Terry Lundgren, chief executive since January 2004, has spent 25 years with the company in several key roles. He is required to own stock that is five times his base salary, thereby aligning his interests with shareholders’.

Earnings for the current fiscal year ending Jan. 30 are expected to rise 41%, and 13% the following fiscal year, according to Thomson Reuters. The five-year annualized growth rate is projected to be 9%, versus 15% expected for the retail industry.

With Forester Value Fund, think long term

Question: What has happened to Forester Value Fund? I am disappointed with recent results.

Answer: This fund, which concentrates on not losing money for shareholders, posted a gain in the difficult 2008 stock market and has a solid long-term record.

However, it also holds a lot of cash whenever portfolio manager Thomas Forester doesn’t see a lot of low-price stock opportunities. This means that at times it can lag behind its large value-fund peers, as it has during the last year and in 2005 through 2007.

The $140-million Forester Value “N” fund has gained 4.4% over the last 12 months to rank in the lowest 1% of “value” funds investing in large-company stocks. However, the fund’s three-year annualized return of 6.5% puts it in the top 1% of its category, and its five-year annualized return of 3.9% ranks it in the top 6%.

“From a long-term perspective, the fund is doing just fine, but the market can be overvalued for several years in a row, and those periods can try investor patience,” said Ryan Leggio, mutual fund analyst with Morningstar Inc. “We wouldn’t want shareholders to bail now, because it will shine when the market does poorly. However, we would limit an individual’s overall position to a maximum of 5% to 10% of overall holdings.”

A strong portion of the portfolio is in healthcare, with other concentrations in consumer goods, industrial materials and consumer services.

This “no-load” (no sales charge) fund requires a minimum initial investment of $2,500 and has an annual expense ratio of 1.27%.

Andrew Leckey answers questions only through the column. Write to him at [email protected].