Macys (NYSE:M): Citigroup upgrading to Buy with $30 target

Citigroup is upgrading Macys (NYSE:M) to Buy from Hold and raising price tgt to $30 from $15:

Our Take — Following recent proprietary mtgs. with mgmt., we are upgrading M from a Hold (2H) to a Buy (1H) rating based on: 1) M’s ability to drive the topline as the My Macy’s localization initiative cont. to gain traction; 2) operating margin tailwinds from product cost deflation and Macy’s speed to market initiative, and 3) upside fr. current levels based on our $30 price target.

Rationale #1: My Macy’s to Fuel Topline — We are encouraged by the consistent, positive early results that Macy’s has reported from its 20 pilot markets since 4Q08, and believe that this localization initiative should lead to improved topline (and margin) trends ahead, particularly beginning in 2010.

Rationale #2: Margin Tailwinds Abound — Macy’s expects benefits from product cost deflation to be greater in ‘10 than in ‘09. Based on our proprietary analysis, cost deflation could boost gross margins by 50 bps next year! Also, Macy’s speed to market initiative is underway, and while Macy’s is a small step behind the competition, we view this as an investment positive, as a majority of the benefits are ahead of us.

Rationale #3: Upward EPS Revisions Warranted — Our previous EPS estimates and consensus are too low in light of the topline and operating margin drivers discussed above. We also view mgmt’s ‘09 guidance as conservative. As such, we raised our 2009-2011 EPS estimates and target price for M. Lastly, we raised our Sept. SSS estimate to (-4) to (-6)%, up from (-5) to (-7)% previously.

Action: This call has everything one might expect from an upgrade: real research by the analysts, near-term catalyst (higher Sept SSS estimate), strong case for longer-term upside, hefty price target - you name it.

I expect investors to take notice and come buying today, sending the shares close to $19 level today. It will be difficult to get fills at decent levels, so you probably need to pay up to get involved.