Upgrade Boosts Macy’s Shares

Macy?s Inc.?s shares rebounded Monday, almost erasing the 4.9 percent decline on Friday,...

Macy’s Inc.’s shares rebounded Monday, almost erasing the 4.9 percent decline on Friday, after J.P. Morgan upgraded the stock to “neutral” from “underweight” and investors digested chief executive officer Terry Lundgren’s defense of the retailer.

This story first appeared in the July 15, 2008 issue of WWD.  Subscribe Today.

Although retail stocks fared better Monday than they did during Friday’s torturous session, the rally in Macy’s shares was exceptional. The Standard & Poor’s Retail Index declined 0.6 percent to end the day at 325.99.

Macy’s shares closed at $16.28 in trading on the New York Stock Exchange, up 70 cents or 4.5 percent. The stock had declined 81 cents to $15.58 on Friday. Other strong gainers included Abercrombie & Fitch Co. (3.6 percent), The TJX Cos. Inc. (3 percent), American Eagle Outfitters Inc. (2.3 percent) and Aéropostale Inc. (1.7 percent).

Among those with large declines were Chico’s FAS Inc. (7.8 percent), Dillard’s Inc. (4.9 percent), J.C. Penney Co. Inc. (4.2 percent), The Talbots Inc. (2.2 percent) and Kohl’s Corp. (2.1 percent).

The J.P. Morgan upgrade was based principally on how steeply Friday’s trading had damaged the stock. “While we still think the company’s divisional integration holds a high degree of risk and that [second-half 2008 and 2009] Street estimates are too high, the stock at $15.58 appears to be more accurately discounting these issues today than about two-and-a-half months ago,” broadlines analyst Charles Grom said in a research note.

The quarter-to-date same-store sales decline of 1.9 percent, revealed in Lundgren’s letter to his management team and consequently to investors, was characterized as “no worse than feared.” Lundgren said Macy’s is doing better than the declines of 2.1 percent, 3.3 percent and 5.9 percent registered by Kohl’s, J.C. Penney and Nordstrom, respectively.

J.P. Morgan also backed Lundgren’s argument that fears about Macy’s liquidity are “unwarranted,” noting that, like Goldman Sachs Group, it had received “numerous questions from investors over the past two weeks.…Given that sales [quarter-to-date] are close to plan, it’s unlikely that Macy’s credit position has eroded further since the end of 1Q, which should alleviate these market concerns.”

Citigroup analyst Deborah Weinswig issued a research note late Monday titled “Liquidity Not an Issue.”

The J.P. Morgan research note was hardly a rubber stamp of Lundgren’s view. The brokerage house said Macy’s will struggle with year-ago comparisons in its home business, where Martha Stewart’s line was launched in 2007, and at Bloomingdale’s. The firm also expects the high-end/luxury business to become more promotional, pressuring gross margins, and for the retailer’s localization initiative to present “the risk that local consumer taste and placed orders may not perfectly align.”

J.P. Morgan said it considers Macy’s earnings-per-share guidance for the full year of $1.85 to $2.15 to be “too optimistic,” and advised the company to “take a page out of Kohl’s playbook and adapt a more conservative outlook. In particular, the company sees [same-store sales] down 1 percent to positive 1.5 percent, which looks too ambitious at this juncture.”

Even as it upgraded the stock, J.P. Morgan lowered its EPS estimates for the company to $1.77 this year and $1.75 in 2009, down from $1.83 and $1.85, respectively.

The note also chided Macy’s for its decision to stop providing quarterly guidance or monthly comps, saying it “has clearly backfired, in our opinion. To this end, the stock appears to be more volatile year-to-date than at any point in 2007.