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Macy’s Profits Rise, But Holiday Outlook Drives Shares Down

Macy's Inc. has jumped onto the rising heap of industry projections of flattish holiday sales.

Macy’s Inc. has jumped onto the rising heap of industry projections of flattish holiday sales.

The nation’s largest department store chain predicted Wednesday that its same-store sales in the fourth quarter could range between a fall of 2 percent and a rise of only 1 percent, totaling $8.7 billion to $8.9 billion. For the year, sales are projected to fall by between 0.3 percent to 1.3 percent, at $26.4 billion to $26.6 billion.

Wednesday’s reading of the tea leaves pushed Macy’s stock down 7.1 percent to $28.47 on the New York Stock Exchange and, along with the government’s retail sales report, drove the overall S&P Retail Index down 2.5 percent to 424.84. Among individual retailers, Dillard’s fell 2.9 percent to $19.03 and J.C. Penney dropped 2.7 percent to $46.73.

The market’s fall Wednesday followed a rally Tuesday on the back of Wal-Mart coming in with strong profits growth in the third quarter even though it projected flat sales to a 2 percent gain for the holiday period. Meanwhile, companies from Polo Ralph Lauren to Coach have recently lowered their outlooks for the year, expressing caution because of the economy.

Earlier this month, the mood began sinking amid the government’s disclosure that consumer spending slowed in October and retail analysts and trade organizations projecting soft holiday sales. Rising fuel costs and the weak housing market are hurting lower- and middle-income consumers the most, though there are signs higher income customers could hold back amid the vagaries of the financial markets and lower Wall Street bonuses as a result.

On Wednesday, Terry Lundgren, Macy’s chairman, president and chief executive officer, put a positive spin on the outlook while expressing caution. “We have a wide range of new and distinctive merchandise in our assortment for the holiday season at both Macy’s and Bloomingdale’s, and we believe we will compete successfully in the fourth quarter despite what continues to be a challenging economic environment,” he said in a statement.

But even with the cards stacked against it — merger aftershock, lack of compelling women’s fashion and macroeconomic issues — Macy’s managed to generate net earnings of $33 million in the third quarter ended Nov. 3, versus a $3 million loss a year ago. The chain came in on the high side of expectations, reporting earnings of 8 cents a diluted share for the period, compared with 3 cents last year.

Excluding integration costs of $17 million related to the acquisition of May Department Stores, earnings per share were 10 cents, hitting the high end of the company’s guidance of 5 to 10 cents.

Expense and inventory controls seem to be the key to keeping earnings up, considering sales in the third quarter were soft, increasing only 0.3 percent to $5.9 billion from $5.89 billion last year. Same-store sales slipped 0.8 percent, which was within guidance, but still reflected the retailer’s challenges trying to get customers to shop the former May stores turned into Macy’s, particularly in the Midwest, as well the uncertain economy and consumer concerns. Macy’s bought May for $17 billion, including debt, two and a half years ago.

Lundgren added that despite the unseasonably warm weather in September and October, “We were able to deliver third-quarter same-store sales within our guidance and earnings per share at the top end of our guidance.”

November’s sales should be higher than a year ago, due to the early Thanksgiving. However, the calendar shift should syphon sales out of December which should be below last year, Macy’s said.

“We’re pleased to have produced earnings at the high end of our expectations,” Karen Hoguet, Macy’s chief financial officer, said during a conference call. “However, we would have been happier had our sales trends been stronger in the quarter.”

She said business in many of the former May doors is strengthening and that home categories are performing well, which is a big change after several disappointing seasons. “When we think about the reasons for the change in the trend in home, it is really a confluence of factors: the Martha Stewart launch, the introduction of the big-ticket business on macys.com, improved localization of assortment and improved marketing, including Internet advertising.”

Hoguet also said center core watches, handbags and fragrances performed well, and that men’s did OK in the quarter, although sales of basic seasonal commodities were slow, probably due to the weather.

“The most concerning trend, as you know, was in women’s apparel,” Hoguet said. “Some of this is clearly weather related, but there does not appear to be enough in the fashion offering that is compelling. There was some strength during the quarter in items where we made investments — fashion sweaters, jackets and outerwear. But basics did not sell as well as we had expected.”

The recent colder weather has helped this business lately, she noted.

Gross margin in the quarter was 39.3 percent, down one point from last year, due to increased markdowns, but Hoguet said Macy’s did a good job managing expenses as well as inventories, which at the end of the quarter were “in good shape and well positioned for the fourth quarter, both in quantity and quality.”

Macy’s, like other retailers and brands, is bracing for another fiercely promotional holiday season. “The holiday seasons are always promotional, so I don’t expect there to be a dramatic change from last year,” Hoguet said in response to an analyst’s question. She later added: “When we think about the mix within that calendar, we are doing more promotionally versus brand than we did a year ago.”

Hoguet also said the company is feeling “really good about” the centralization of Macy’s home business, which started three years ago and hasn’t shown much life until recently apparently.

“A couple of weeks ago, I had the opportunity to spend a day at the home division, and just listening to the merchants talking about how much they’ve learned about the fact that assortments are different store to store, even within markets, and how they’re working to localize those assortments to meet the local needs is terrific,” Hoguet said. “And that’s something we’re applying throughout the company. There’s a project under way that we call ‘My Macy’s’, which is trying to focus on tailoring the assortments store to store, and I believe that’s now happening at the home store.”

Asked if Macy’s would contemplate centralizing apparel as well, Hoguet replied: “As long as we’re localizing the assortments through our division structure, that’s the way we will do it. You know, with apparel, it’s a little trickier than home.”

Aside from Martha Stewart and private label offerings, Hoguet cited cashmere in terms of sweaters, scarves and gloves; an expanded candy offering, including Franco’s, and electronic picture frames, as potential big holiday sellers. She also cited a personalized electronic gift card on which customers can put their pictures, and handwoven baskets and bowls made by women in Rwanda. Hoguet didn’t have any specifics on the Martha Stewart Collection launch, other than saying, “Martha product has been performing well, but we believe it’s also driven people into our home departments, perhaps other parts of the store, and helped the overall home business. So we feel really good about that.”

The Midwest, where some consumers have resisted the former May doors converted to Macy’s, and Florida, where the housing market has been weak, have been the retailer’s toughest regions. California was described as fine, despite the fires, and as far as the May merger overall, and how the former May doors have lagged the legacy Macy’s doors, Hoguet said: “The spread is narrowing. We’re feeling much better about the performance of most of the May doors.”

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