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Fed’s Outlook, Macy’s Spark Retail Stocks Rally Tuesday

Encouraging news boosted retail stocks to their best day in more than two months.

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Although Macy’s profits and revenues dropped in the quarter, the retailer’s results were better than expected.

John Aquino

Better-than-expected results from Macy’s Inc. and some modestly encouraging remarks from the Federal Reserve chairman that the recession might end by 2010 boosted retail stocks to their best day in more than two months.

This story first appeared in the February 25, 2009 issue of WWD.  Subscribe Today.

 


And it seemed little could dent the optimism — not even the worst monthly report from The Conference Board on consumer confidence, which sank to a new all-time low as the public grew more fearful about job losses in February.

By the time Tuesday’s trades were all processed, the S&P Retail Index had advanced 11.08 points, or 4.6 percent, to close at 252.28, erasing a week’s worth of declines. The advance was the best on a percentage basis

 

since a 5.3 percent bump on Dec. 16, when the Fed used one of the last available tools in its fiscal arsenal and lowered interest rates to practically zero. One of the few retailers to see its shares fall Tuesday was Target Corp., which posted a sharp drop in profits as it appeared to admit Wal-Mart Stores Inc. was winning the value perception game.

All major indices enjoyed bountiful gains on Tuesday, but none as hefty as the retail gauge. The Dow Jones Industrial Average was up 3.3 percent to 7,350.94, allaying fears it might flirt with the 7,000 mark, but was outperformed by the S&P 500 (up 4 percent to 773.14) and the Nasdaq Composite (up 3.9 percent to 1,441.83).

Even as Asian and European markets suffered declines on Tuesday, U.S. stocks bounced back after Federal Reserve Board chairman Ben Bernanke, speaking before the Senate Banking Committee, forecast a “reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.” He emphasized the need for a stabilization in the banking and finance sectors to effect a “strong recovery” and added that any turnaround from the “severe contraction” would depend largely on the Fed’s and the Obama administration’s ability to get the credit and financial markets operating on a more normal basis.

Despite Bernanke’s relative optimism, consumers remain ever-more pessimistic. The Consumer Confidence Index is now at 25, down from 37.4 in January. Both components of the index dropped, with the Present Situation Index falling to 21.2 from 29.7 last month and the Expectations Index plummeting to 27.5 from 42.5 last month.

“The decline in the Present Situation Index, driven by worsening business conditions and a rapidly deteriorating job market, suggests that overall economic conditions have weakened even further this quarter,” said Lynn Franco, director of The Conference Board’s Consumer Research Center.

Franco noted, “All in all, not only do consumers feel overall economic conditions have grown more dire, but just as disconcerting, they anticipate no improvement in conditions over the next six months.”

Still, Wall Street seems desperate to grab on to any glimmer of hope — and Bernanke’s statements and Macy’s performance sent traders scurrying to buy, taking advantage of historic lows in many retail shares. Here, details of Macy’s and Target’s fourth-quarter and year-end results.

 

MACY’S INC.

Despite falling income and revenues and a major restructuring in the works, Macy’s says it’s keeping its act together, and better than most.

On Tuesday, the department store group, hurt by markdowns and restructuring charges, said fourth-quarter profits fell 58.7 percent to $310 million, or 73 cents a diluted share, from $750 million, or $1.74, a year ago. Revenues dropped 7.7 percent to $7.93 billion from $8.59 billion and were down 7 percent on a comparable-store basis.

Excluding some nonrecurring items, the company said it would have earned $1.06 a share, beating analysts’ expectations of $1.01 a share, according to Yahoo Finance.

For the year ended Jan. 31, Macy’s profits sank 68.8 percent to $280 million, or 66 cents a share, on sales that fell 5.4 percent to $24.89 billion.

Despite the numbers, Macy’s claimed a market share victory based on the sharper sales declines at competitors, and Wall Street seemed to agree, sending the retailer’s shares up 12 percent to close at $8.29.

“We beat every single competitor you could probably name,” Terry Lundgren, Macy’s chairman, chief executive and president, asserted in an interview. “The only one was Wal-Mart, which is significantly penetrated in groceries and pharmacy products and things that have inflation attached. No apparel-based department store was near us.”

Considering the economy, officials at the company “were pleased with our results,” Karen Hoguet, Macy’s chief financial officer, said on a conference call. “Comp-store sales growth exceeded that of our peers in the fourth quarter and consistently throughout the year. That indicates to us that our strategies are resonating with our customers. We ended the year with more cash on our balance sheet than we had planned.”

Macy’s expects the business picture to get uglier before improving. The company projects a 6 to 8 percent comp-store sales decline in 2009, with sales seen tougher this spring than in the fall, and earnings per share for the year falling to 40 to 55 cents.

The company ended 2008 with more than $1 billion in cash, but expects cash to be lower at the end of this year due to restructuring costs related to severance payments, personnel relocation, system integration and pension contributions, despite capital spending that’s been slashed to $450 million from around $900 million.

Nevertheless, officials pointed to certain hopeful signs, including positive results on stores receiving merchandising through its My Macy’s localization program in 20 areas of the country, a 24 percent increase in Internet sales during the fourth quarter and good performances by exclusive or near-exclusive product.

Product exclusivity, in Lundgren’s eyes, is critical. It’s one of four key initiatives at Macy’s, along with simplifying pricing and adding more everyday low pricing, improving marketing through national advertising and improving the in-store experience, meaning customer service.

On exclusivity, the ceo said the program to open FAO Schwarz shops inside Macy’s is being rolled out, to a total of 675 in the next two years from 250 last fall, thereby putting toys in all Macy’s stores that carry children’s apparel.

According to Lundgren, the Tommy Hilfiger exclusive sportswear collection was the best-selling brand in the store last year and the exclusive Martha Stewart collection has become the largest volume business in home.

“Supply and demand was a major factor,” Lundgren said. “A big problem with a lot of apparel is that there is just too much inventory out there, either identical or too similar.”

He also said Macy’s customer service is improving, and that there’s “more balanced” marketing connecting with consumers. National ads spotlight Macy’s exclusives with celebrities like Martha Stewart and Donald Trump, and last year also spotlighted the “Believe” campaign, which encouraged children to write to Santa. Until Macy’s became national, through its acquisition of May Department Stores Co. three years ago, “we could never do those things,” Lundgren noted.

Asked if the markdown mania is continuing, he replied, “There is still tremendous value for consumers out there today and there will be” going forward. “But the level of additional markdowns should be subsiding somewhat. There is just less supply now. We have 7.5 percent less inventory on a comparable basis than last year.”

Lundgren did say that Bloomingdale’s had a sharper decline in the fourth quarter than Macy’s due to the softness in the luxury market, declines in tourism and Wall Street layoffs.

While grappling with the worsening economy, Macy’s triggered a large and complicated restructuring earlier this year, involving consolidating four divisions into one. It’s also building up the new My Macy’s field organization geared toward localizing the merchandising of all its stores across the country and quickly respond to local demands.

Lundgren acknowledged Macy’s has a lot on its plate, but added, “In my view, if you’ve got a vision — and we do for how we can organize to be the most competitive retailer in the country — why do that over two or three years, when you already know 2009 is going to be challenging? My goal was to do it now. We wanted to put everything into this right now.” And because of that, “Macy’s will come back sooner than others.”

“Macy’s Inc. has been very aggressive and proactive,” Hoguet said. “We’ve made many tough decisions and taken what we considered to be bold action to drive sales profitability and to preserve cash. We see Macy’s Inc. better positioned than ever for the future.”

Lately, women’s suits, shoes, cold weather accessories and housewares are the best-selling categories. “Suits are selling well [because] it’s good-value sportswear and you [might] want something for an interview,” Lundgren said. He added that Martha Stewart picked up traction, particularly in housewares, as more people stay at home and cook. He also cited men’s furnishings and women’s shoes, stimulated by boots, as strong categories.

On the other hand, the furniture business has been off due to the housing slump, and the handbag category, after being on a multiyear roll, is now a “well-developed business” hitting tough comparisons versus prior years. In women’s, bridge, Macy’s top price point, is among the weakest categories.

“In many ways, 2008 was the most difficult year that I have ever experienced. It was so hard to predict,” Lundgren said. “The drop-off in the second half for most retailers who don’t sell food was pretty big.” He said 2009 would be “challenging, but at least we are now able to forecast what’s in front of us.”


TARGET CORP.

The Wal-Mart low-price juggernaut may have been too much for Target during the holiday season.

As it released fourth-quarter results Tuesday, Target Corp. acknowledged there has been a misconception among consumers with regard to its prices and that it had trouble recruiting value-seekers to its stores. Nor did the mass retailer capture as many affluent consumers trading down from department stores as expected.

Part of the reason is the makeup of Target’s merchandise. “Two-thirds of Wal-Mart’s assortment is consumables and basic items, whereas it’s the inverse at Target, where about one-third of the mix is consumables and basics,” said Joseph Feldman, a retail analyst at Telsey Advisory Group.

During the quarter ended Jan. 31, net income at the Minneapolis-based retailer declined 40.8 percent to $609 million, or 81 cents a diluted share, from $1.03 billion, or $1.23 a share, in the year-ago quarter. Wall Street was expecting earnings of 83 cents a share. Net sales contracted 1.6 percent to $19.02 billion, from $19.34 billion, compared with the $19.53 billion in sales analysts predicted.

Target was one of only a few retailers to suffer a decline in its stock price Tuesday, closing down 60 cents, or 2.1 percent, at $27.83.

For the year, Target’s net income declined 22.3 percent, to $2.85 billion, or $2.86 a share, while sales rose 2.3 percent to $62.9 billion. However, reflecting the difficulty of getting customers into its stores, Target’s comp-store sales declined 2.9 percent in 2008.

“The economy contracted at its fastest pace in decades,” said Gregg Steinhafel, chairman, president and ceo of Target, during the company’s conference call. Steinhafel cited “a fundamental change in the consumer’s spending pattern, particularly in higher-margin discretionary categories such as apparel.” This led to higher markdowns. “With appropriate pricing to remain competitive, Target was able to exit the year in a very clean inventory position,” he said.

The credit card business also weighed on Target’s results. Average receivables in the fourth quarter increased 9.6 percent to $9.1 billion in 2008 from $8.3 billion in 2007. Average receivables directly funded by Target declined 36.2 percent in the fourth quarter to $3.6 billion from $5.6 billion in 2007, reflecting J.P. Morgan Chase & Co.’s investment in the receivables portfolio.

The credit card segment incurred a $135 million pretax loss in the quarter, compared with a $189 million profit in the fourth quarter of 2007. The loss was attributed to an increase of $245 million in the allowance for doubtful accounts in the quarter. Profits for the credit card segment declined 80.5 percent to $155 million in 2008, from $797 million in 2007. Target added $440 million to the allowance for doubtful accounts in 2008.

The retailer’s pipeline of new stores will begin to taper off sharply in fall 2009 and into 2010, with only five to 30 units planned for 2010. In 2011, the number of new stores could rise to 60. In contrast, Target opened 108 stores in 2008. “We envision investing just over $2 billion in 2009,” said Douglas Scovanner, executive vice president and chief financial officer. “We might invest $2.5 billion if we were to see clear and meaningful improvement in the economy.”

Kathryn A. Tesija, executive vice president of merchandising, admitted that focus groups indicated consumers were surprised that Target’s prices are “as good as they are and so close to the competition.”

So Target is refocusing its advertising on nondiscretionary products. “We’re merchandising great value much more aggressively,” she said. “We’re also expanding our own brand presence because it delivers exceptional value to our guests and strengthens loyalty.”

While Target is focused on communicating the “Pay Less” side of its strategy, Tesija said the company is commited to “Expect More.” “We’ll showcase nine designer partnerships in the first half of 2009, compared with eight in first half,” she said. “We have seen fabulous results form our first designer of the year, Orla Kiely. We’re really excited to kick off our collaboration with Alexander McQueen and his edgy collection. We will highlight two new eco-friendly designers for Earth Week. Our limited-time-only initiative will feature Felix Ray handbags and Miss Trish of Capri shoes, and the bold and colorful prints of Tracy Feith will be our next Go International launch in May.”

“Target’s message [low prices vs. strong design] had been muddled for the last half year or so,” said Feldman. “[Target] made the change in the circulars, which very clearly emphasize value. But the TV advertising has tended to be image advertising, very hip and cool, not, ‘Come on in and get your $10.99 jeans.’ Target said they’re aware there’s a misperception about price. This is the first time I felt there was a real conviction for the value message. This was a big step in the ‘Pay Less’ strategy.”

Scovanner said the company expects comps to decline 8 to 10 percent for many discretionary categories of business in the short term. Food and health care will continue to perform very well with upper midsingle-digit increases. “We’re very conservative on apparel and home,” he said. “That’s how we have purchased for the spring season. We’re planning our [nondiscretionary] businesses optimistically. We do not want to miss a sale in food or commodities.”

Private label is becoming a big initiative for Target and the retailer is expanding its proprietary assortments, particularly in the food and consumables category.

Standard & Poor’s Ratings Services on Tuesday affirmed Target’s credit ratings, but lowered its outlook to “negative” from “stable.” Diane Shand, S&P credit analyst, said the revision “reflects the underperformance of Target’s credit card and discount store operations in the fourth quarter of 2008 and our expectation that these businesses will remain challenged by the recession in the U.S.”

Coming off its report late Monday of lower fourth-quarter earnings and reduced guidance for 2009, Nordstrom Inc. was put on review for possible downgrade by Moody’s Investors Service. That didn’t prevent the Seattle-based retailer from enjoying a $2.36, or 20.8 percent, gain as its shares ended the day at $13.69.

 

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