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Macy’s Bullish On Holiday

Net income at Macy's rose to $10 million in the third quarter.

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Macy’s Inc. executives said Wednesday that third-quarter profits and sales beat their expectations, overcoming sluggishness in early October, and exuded optimism about the upcoming holiday season to a degree not seen in years.

“Our results continue to build, and with each quarter come new initiatives where we haven’t fully realized our potential. These just become additive,” Terry J. Lundgren, Macy’s chairman, president and chief executive officer told WWD. “The last couple of years we were all concerned about how the holiday season would turn out, but last year we ended up having a very good fourth quarter. I felt OK. I didn’t feel good at all about 2008. Certainly, this is a better moment in time.”

Lundgren said the My Macy’s localization program has “firmly taken root”; that Bloomingdale’s has “aggressively capitalized on the return of the upscale customer”; that the company has been using “significant” cash to strengthen the balance sheet by reducing debt by more than $1.2 billion this year, leading to lower interest costs, and that macys.com is rapidly growing. Macy’s currently has $6.98 billion in long-term debt.

Asked about Macy’s taking market share from competitors, Lundgren replied: “Our results have been good and they have been improving from quarter to quarter versus the retail index and the general landscape. I would assume we are taking market share,” though he didn’t say from whom. Kohl’s Corp., Dillard’s Inc. and J.C. Penney Co. Inc. are among Macy’s most direct competitors.

While Macy’s may be opening some distance from other retailers, Lundgren suggested the industry in general should be improving. “We had 9.5 percent unemployment last year and 9.6 percent this year. But the difference is that people who have jobs today believe they are going to keep those jobs. A year ago people weren’t sure. We still don’t have the high levels of consumer confidence we’ve been used to, but people are feeling more secure about their income stream and the position they are in, and they are managing with some visibility into the future. A year ago they lacked that vision.”

“Our organization is ready and prepared to execute the fourth quarter to a whole new level,” added Karen Hoguet, Macy’s chief financial officer, on a conference call Wednesday after the company disclosed that net income rose to $10 million, or 2 cents a diluted share in the third quarter ended Oct. 30, against a loss of $35 million, or 8 cents, in 2009. Sales rose to $5.62 billion from $5.28 billion, and 3.9 percent on a comparable store basis. Year to date, Macy’s sales are up 7 percent in total and 4.7 percent on a same-store basis. Online sales (macys.com and bloomingdales.com combined) were up 24 percent in the third quarter and 28.5 percent year to date.

“It was a good quarter, and now we are ready for the fourth quarter,” Hoguet said.

Macy’s projected same-store sales in the fourth quarter to be up 3 to 4 percent, and increased earnings guidance for the second half to $1.50 to $1.55 a diluted share, from previous guidance of $1.45 to $1.50. Full-year earnings per share are seen at $1.94 to $1.99, up from a previous forecast of $1.89 to $1.94.

Amid all the glee, the day was not without concerns, including rising costs of sourcing overseas. Also, Macy’s acknowledged gross margins will be “flattish” for the fourth quarter, but Lundgren and Hoguet concurred that he 850-unit department store chain, which posted $23.5 billion in sales in 2009, won’t be any more promotional than last year. Hoguet said inventories are up 1.9 percent but “well below” the comp-store trend.

Macy’s best-selling areas last quarter were fashion watches, the INC private brand, cosmetics, fragrances, men’s and luggage. The weakest areas were cold-weather-related products, tabletop and traditional sportswear.

In a rundown of the store’s performance last quarter by category, Lundgren said: “Traditional women’s sportswear was weaker, but actually contemporary brands, INC and brands like that, were quite strong. I do think some part of the overall women’s apparel business was impacted by warmer weather in the first half of October. As the weather cooled, women’s apparel got better,” reflecting greater demand for heavier fabrics typifying fall and holiday dressing.

“The men’s business has been on a roll for some time now,” Lundgren added, partly because less of the assortment [compared to women’s] comprises outerwear, which has been soft so far this year, and partly because some trends have taken hold, including slimmer fits in pants and shirts that work well with narrower ties,” Lundgren explained. “It’s really attracted younger business into the store.”

Lundgren also said retailers won’t be able to use weather as an excuse for weak sales much longer. “The weather issue will be a nonissue over time unless there is a big snowstorm on an important day.… The coat business will come, and the scarves and mufflers and gloves and all those accessories so important this time of year will indeed happen.”

Other initiatives that Lundgren considers additive to results include the new “magic selling” training program launched last summer for the chain’s 130,000 sales associates and sales managers, and seasonal hires as well. “Magic” is an acronym for meet and make a connection with a customer, ask questions, give options and advice, inspire to buy, and celebrate the purchase. Lundgren also cited Macy’s new in-store gift shops in 400 doors stocked with “limited edition, fun gifts mostly under $50” and themed around keeping warm, pampering and exclusive celebrity products from Jessica Simpson, Kenneth Cole and Rachel Roy, among others.

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