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Here's One Retailer With A 30% Upside... Post-Black Friday

Now that the busy holiday shopping season is behind us, it's time to look at which department store retailers are set up for the long haul.

Investing for the long run involves sticking with a retailer known for consistency in terms of product offerings, management and price. For investors, what makes a great retail investment is a nice dividend, strong balance sheet and robust returns on equity.

These days, most department store retailers lack these qualities, especially J.C. Penney (NYSE: JCP) and Sears (NYSE: SHLD). The one department store retailer that shoppers and investors alike can count on is Macy's (NYSE: M).

Macy's possesses all the necessary qualities based on value and growth. Going forward, Macy's has a number of initiatives to drive both its top and bottom lines. The retailer performed well during the holiday season, executing on its Black Friday platform and various strategies.

The department store retailer recently announced November and December (holiday season) sales, which revealed that comparable-store sales were up 3.6% year over year. If you include sales from licensed departments within Macy's, comparable-store sales rose 4.3%.

Several Growth Measures In Place
Macy's primary focus is its My Macy's program, which is focused on figuring out what a particular region's customers want in their stores. After all, what sells in Arizona might not necessarily go over well with customers in New York. Macy's has 1,600 experts deployed in 60 cities across the country to monitor trends and help guide purchasing decisions.

In addition, Macy's store-within-a-store concept is starting to take off. The company has partnerships with Finish Line and Sunglass Hut to have their stores located with a Macy's location. By the end of this year, Macy's plans to have about 450 Finish Line stores within its stores.

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Macy's performed well during the holiday season, executing on its Black Friday platform and various strategies.

Macy's is also one step ahead of the competition with its omni-channel presence. Omni-channel retailing takes the idea of multi-channel retailing a step further. In contrast to multi-channel retail strategies that use brick-and-mortar stores, websites and mobile applications somewhat independently of one another, omni-channel retailing integrates all of these strategies. One example is the ability of customers to order a product online and pick it up at the nearest brick-and-mortar store.

Part of Macy's omni-channel strategy includes a $170 million investment in a new direct-to-consumer distribution center in Oklahoma that's intended to give the company a presence in the middle of the U.S. and help it easily fulfill customer orders and shipments from across the country. Macy's expects the first orders to ship in summer of 2015.

The other focus for Macy's is in getting more millennials (people born between the early 1980s and the early 2000s) into its stores, with Impulse areas for older millennials and MStyle Labs for younger millennials. This year, Macy's plans to add 13 new brands to target the millennial generation.

Cost-Saving Program Paying Off
Macy's is also focused on the bottom line. In a surprise move, Macy's announced a comprehensive cost savings/restructuring program that is expected to generate $100 million in savings annually, starting in 2014. As part of the program, the company will combine its Midwestern and Northern regions and realign and reduce staffing at its stores and back office operations. Combined, the retailer is laying off 2,500 of its 175,000 employees.

For the upcoming year, the company is now forecasting earnings per share (EPS) of $4.40 to $4.50, which is better than the consensus estimate of $4.36. Macy's also sees comparable-store sales growing 2.5% to 3% this year. J.C. Penney and Sears, on the other hand, are losing money (though my colleague Jody Chudley did find something to love about SHLD earlier this month).

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A couple of notable competitors that are turning a profit, however, are discount retailers Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) -- yet Macy's trades below these two on the basis of both price-to-sales and EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation, and amortization). Macy's also has a return on equity of 25%, which is better than both the discount retailers.

With profits and cost-saving measures, Macy's is looking to reward its shareholders. In the third quarter, Macy's repurchased over 10 million shares for $447 million. The company still has $1.75 billion remaining on its current authorization program, and I'm looking for the company to again be an active buyer of its shares this year.

Risks to Consider: While Macy's does cater to a more affluent customer base, it's still not immune to a weak economy. Also, the retail industry is being threatened by e-commerce. Macy's is making a number of investments to improve its omni-channel strategy and implementing a cost-saving program, but one or both of them might not be as effective as anticipated.

Action to Take --> Buy Macy's with a price target of $70 for upside of 30%. That would put Macy's trading at a price-to-earnings (P/E) ratio of under 16 times forward earnings, right in line with major peers Target and Nordstrom (NYSE: JWN). Macy's also has a 1.8% dividend yield, which is only a 26% payout of earnings. It's trading right around its 52-week high, but it's still over 30% off its 2006 high of $78.

This article originally appeared on StreetAuthority.com as: The One Department Store Stock You Can Trust.

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