By and  on August 14, 2014

Wall Street didn't much like Macy's Inc.'s second-quarter report and its cut in comparable-store sales outlook for the year, but Terry J. Lundgren, the store’s chairman and chief executive officer, says take a closer look.

Macy’s is on track, back-to-school is proceeding well and the company will meet its stated earnings goal for the year, Lundgren told WWD in an interview Wednesday, just after the $27.93 billion department store giant posted its quarterly results.

“The market got a little ahead of us. We are saying we were up 4 percent on sales, and 11 percent in earnings [per share] for the quarter. I actually think that is pretty good,” Lundgren told WWD. “We are confident we will make the annual earnings forecast provided. The analysts got a little ahead of us in terms of what they were expecting by individual quarter.”

Leading off retailers’ quarterly earnings season with profit improvement that Wall Street translated into a bottom-line “miss,” Macy’s reined in its expectations for comparable sales increases for the year to a range of 1.5 to 2 percent from earlier guidance that was a point higher. Sales trends in the just-completed quarter did not compensate for the weak first quarter, triggering the revision.

While Macy’s maintained its full-year earnings guidance at the previous range of between $4.40 and $4.50 a diluted share, the company paid a price on Wall Street for its muted sales forecast and its quarterly earnings per share, which came in at 80 cents instead of the 86 cents analysts expected. The retailer’s shares fell 5.5 percent to $56.47, the second-greatest fall among the 100 shares in the WWD Global Stock Tracker.

Still, the EPS last quarter was 11 percent above the 72 cents of a year ago, as Lundgren noted. Net income in the three months ended Aug. 2 was $292 million, up 3.9 percent from $281 million in the second quarter of 2013.

Sales rose 3.3 percent to $6.27 billion from $6.07 billion in the year-ago period. Comparable sales were up 3.4 percent, with the figure rising to 4 percent with the inclusion of departments licensed to third parties.

Gross margin declined 40 basis points to 41.4 percent of sales from 41.8 percent in the 2013 period. Inventories at quarter’s end totaled $5.42 billion, up 1.1 percent from the $5.36 billion on hand at the end of the prior-year quarter.

B-t-s assortments performed well late in the quarter, though men’s and women’s sportswear and nonathletic shoes remained soft throughout the period. To compensate for lagging categories, Lundgren said Macy’s will focus more intensely on main-floor businesses, such as accessories and handbags, and on home areas, such as big-ticket items, sofas and bedroom sets in particular, which rebounded last quarter.

Omni strategies are also an opportunity to spur growth, Lundgren said, indicating that the buy-online, pickup-in-store service, fully rolled out at Macy’s and Bloomingdale’s, is just beginning to be advertised.

Supporting the omni cause, omni centers at the stores, for picking up online orders, are starting to operate at a handful of Macy’s stores. “We are quick to try things and test things and get the bugs out and respond,” Lundgren said. “As soon as I figure out what we need to tweak and change, then we will roll them out.” That should happen sometime next year, he added.

“We feel good about our fall season,” Lundgren continued, adding that the guidance down on comps for the year is really based on the first-quarter performance, which was hurt by snowstorms and related store closings.

Regarding the second half, “There is no change” in the outlook, Lundgren said.

For a few years, Lundgren has characterized Macy’s as outperforming the competition. On Wednesday, he reiterated the position and said the second-quarter performance doesn’t change his view. “I think it clearly holds up,” Lundgren said. “The economy has not been growing to the same degree that Macy’s has been growing. We know we have been taking market share. We expect to continue to do so. We have created a base of customers who have become more and more loyal to us, and we will continue to ride that wave in the second half. We don’t need to have customers spend more money. We just have to have them spend more money with us. When they buy two pairs of shoes with us, let’s get them to buy three.”

Lundgren said b-t-s is off to a very good start, paced by kids, juniors, active, Impulse and Finish Line. “I am hoping that continues for the next three or four weeks,” he said. Millennial strategies have sharpened the merchandising and marketing to customers in the age range of 13 to 30, the ceo added.

With men’s and women’s sportswear “a challenge right now...we are just going to have to get more out of the main-floor businesses,” Lundgren said.

He also said Macy’s is capitalizing on a trend in Chicago and certain other cities of returning to urban life, and downsizing from large, three- or four-bedroom homes, to one- or two-bedroom apartments.

Lundgren did temper the optimism by stating that many customers still are not feeling comfortable about spending more in an uncertain economic environment.

In the year’s first half, net income increased 3.6 percent to $516 million, or $1.40 a diluted share, from $498 million, or $1.27, a year ago, while revenues were up 0.7 percent to $12.55 billion from $12.45 billion. Comparable sales were up 0.8 percent and ahead 1.5 percent including licensed departments.

Merchandise margin was down about 30 basis points in the quarter and gross margin is expected to be flat to down slightly for spring and the year. Comparing gross margins to the prerecession levels of 2007, Karen Hoguet, chief financial officer, said during a conference call, “We have maintained our gross-margin level even though factors like free shipping hadn’t yet entered the equation back in 2007. And our earnings per share have more than quadrupled.”

Richard Jaffe, analyst at Stifel Nicolaus, reiterated his “buy” rating on the stock and $64 target price. “Management indicated that early reads from back-to-school are strong, which leads us to believe fall assortments are trend-right and promotions are compelling.”

He added, “Our outlook is favorable, given the company’s market dominance (approximately 10 percent of total U.S. apparel sales), extensive assortment of both exclusive and national brands distributed regionally…and the success of the omnichannel shopping initiative.”

Standard & Poor’s Ratings Services maintained Macy’s “stable” outlook.

While S&P believes the apparel industry trends will remain “relatively soft” for the remainder of the year, it expects Macy’s “continuing enhancement on its omnichannel capability and ongoing operating initiatives will help the company gain customer traffic either online or in stores and offset pressure on margins,” according to a note from analysts Helena Song and Tobias Crabtree.

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