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Macy’s Profits, Sales Fall

Macy's trims full-year forecast as profits and sales fall.

At Macy’s Inc., there’s a dim view of the near future and a brighter one for next year.

This story first appeared in the August 14, 2008 issue of WWD.  Subscribe Today.

On Wednesday, the 850-unit retailer lowered projections for the year upon reporting that second-quarter profits fell 1.4 percent and sales declined 2.9 percent.

But there’s hope that programs where Macy’s is investing heavily — the My Macy’s initiative to localize assortments on a door-by-door basis, exclusive collections from the likes of Tommy Hilfiger and Martha Stewart, new national marketing and a buildup of FAO Schwarz toy shops inside Macy’s units — will bolster results when the economy recovers. Some of the moves could also help fall sales, though the outlook is for possible further revenue declines in the third quarter and improvement in the fourth quarter.

The second-quarter numbers weren’t anything to crow about, but Macy’s executives had a positive spin, saying earnings and cash flow came out better than expected, and that competitors are faring worse. With Macy’s beating Wall Street’s earning expectations and demonstrating effective inventory control, the company’s stock rose 39 cents to close at $20.66 on the New York Stock Exchange.

“Our organization rose to the challenge and delivered strong second-quarter earnings and cash flow, despite the poor economic environment,” said Terry Lundgren, chairman, chief executive and president.

“While we are never fully satisfied when sales are down, we continued to outperform most of our major competitors in same-store sales and to gain market share with a combination of differentiated merchandise, current fashions and great value.…We are looking forward to launching our exclusive Tommy Hilfiger product in September, followed by the addition of exclusive FAO Schwarz toy shops in up to 275 Macy’s stores this fall.”

Lundgren also cited the upcoming celebration of Macy’s 150th birthday, which will entail special events and promotions, and “a fresh approach to holiday marketing.”

He added the My Macy’s localization initiative is on track and would impact sales beginning in spring 2009.

For now, though, Macy’s is being hit by the poor economic conditions just like almost every other retailer. The company’s net income slid to $73 million, or 17 cents a share, compared with the year-ago’s $74 million, or 16 cents.

Costs related to downsizing Macy’s to four divisions from seven, and charges related to two poorly performing private labels, Karen Scott and John Ashford, inherited from May Co. reduced earnings by 12 cents. Sales for the three months ended Aug. 2 dropped 2.9 percent to $5.72 billion from $5.89 billion.

Consequently, Macy’s cut its earnings projections for the year to $1.70 to $1.85 a diluted share (excluding one-time consolidation costs) from $1.85 to $2.15.

Karen Hoguet, executive vice president and chief financial officer, in a conference call with analysts, said second-quarter sales were strongest in the Northeast and Texas and weakest in the West and the upper Midwest. “Bloomingdale’s, bloomingdale’s.com and macy’s.com all continued to have very strong growth in the quarter.”

Jewelry, cosmetics, shoes, men’s furnishings, men’s collections, housewares and mattresses fared the best, while ready-to-wear, intimate apparel, men’s tailored clothing, men’s classification sportswear, children’s, textiles and tabletop were poor.

“As we look at our business trends, we believe that our fall comp-store sales could fall short of our flat expectation by approximately one point,” said Hoguet. “This then would translate to a full-year comp-store sales performance down approximately 1 to 1.6 percent. And should that happen, earnings would most likely also be lower.”

She predicted a weaker third quarter than fourth quarter. In the latter period, “We feel very good about our merchandising and marketing strategies.”

On the other hand, “We are not ignoring the risks that so many of you have pointed out. We are managing our receipts and expenses accordingly.”

Addressing progress on the My Macy’s program, Hoguet said during the second quarter most of the time was spent on training new people and visiting stores.

But there are also merchandise changes in the works, with 1,700 merchandise requests received. “Over half of the requests have been to review future on order, given the strong sell-throughs in a particular category, department or item,” Hoguet said. “About a third of the requests coming from the field relate to desired assortment changes like adding a vendor or a category, adjusting the style mix or modifying replenishment parameters. These requests have all been the direct result of district planner and district merchant visits and discussions in the stores.”

The program isn’t at the point yet to “move the needle” on sales, but there have been some “quick wins,” Hoguet said.

Many of the requests center on licensed sports related product, based on information on which sports and teams are most important to customers at specific stores. In two Midwest regions, licensed product is running more than 20 percent over plan since the product hit the stores, Hoguet said. �