Department store operator Macy's (NYSE:M) reported very solid second quarter results on Wednesday. However, the strong sales and earnings report was lost in overall market volatility. The market is also currently ignoring Macy's reasonable valuation and strong trends at its existing store base. (For more on retailers, check out Analyzing Retail Stocks.)

TUTORIAL: Earnings Quality

Third Quarter Recap
Sales advanced 5.3% to $2.3 billion as same-store sales improved a very healthy 4.9%. Online sales jumped 43.3% to boost comps and overall sales in the period ending on October, 1 2011 on strong trends at both the namesake website and, the latter of which competes with the likes of Saks (NYSE:SKS) and Nordstrom (NYSE:JWN) at the higher end of the department store market.

Macy's upped its full-year earnings guidance and now expects to report profits between $2.60 and $2.76 per diluted share. Analysts currently project sales growth of nearly 5% to just over $26 billion. Analysts are expecting earnings of $0.16 per share, which is a 100% increase from a year ago. They are also predicting a 4.6% increase in sales with revenue coming in at just under $5.9 billion or a 4.6% increase.

Given the recent stock market swoon, Macy's trades at less than 10 times forward earnings expectations. This represents a very reasonable multiple and the current dividend is yielding at 1.4%. Management boasted that it had its best spring selling season in more than a decade and continues to benefit from tailoring merchandise selection to local tastes and improved consumer spending.

There appears to be further room to improve sales and profits at the existing store base. In similar fashion to JCPenney (NYSE:JCP), new store growth appears more limited, though Macy's plans to open three new stores during the second half of the year.

The Bottom Line
In general, department stores, including Macy's and Dillard's (NYSE:DDS), look to be regaining market share they have been losing for years to big-box retailers and more focused soft line retailers. A focus on more fashionable merchandise and a wider array of selection have been key factors and should continue to help Macy's and its peers regain share going forward. (To learn more about earnings, read Everything Investors Need To Know About Earnings.)

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Tickers in this Article: M, SKS, JWN, JCP, DDS

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