By  on February 27, 2008

Macy's Inc., managing its way through negative sales trends and merger issues, posted fourth-quarter results that by some measures surpassed the competition.

On Tuesday, the department store said earnings rose 2.3 percent to $750 million, or $1.73 a share, as sales for the quarter ended Feb. 2 slid 6.2 percent to $8.59 billion from $9.16 billion. Sales on a comparable-store basis were down 2 percent.

The results on both the earnings and sales sides were better than expected, given the challenges Macy's has experienced digesting its May Departments Stores Co. acquisition of 2005, winning over May shoppers, and creating excitement on its apparel floors. Excluding May integration costs of $69 million, fourth-quarter earnings per share from continuing operations were $1.83. Included in the quarter is a noncash tax credit of $78 million. Without it, EPS from continuing operations were $1.65.

Macy's stock closed up 7.1 percent Tuesday at $26.52 on the New York Stock Exchange. Macy's has been aggressive about consolidating and reworking its infrastructure to cut costs and improve efficiencies. However, the retailer will no longer issue monthly same-store sales because it believes calendar changes and switches in its promotional schedule distort the significance of monthly comparisons, and that quarterly results provide a more accurate performance picture. Macy's sales growth has been lackluster for months.

Discussing the results, Macy's top executives portrayed their team as getting nimbler managing inventories and markdowns, and cited improved trends at former May doors. "We are pretty good at controlling inventory, not giving the product away when we don't need to, making sure promotions are thoughtful as opposed to just across the board and making sure we keep expenses in check," Terry Lundgren, Macy's chairman, chief executive officer and president, said in an interview.

"The sales performance was ahead of our peers, giving us comfort that our strategy is appropriate and that the execution is on track," said executive vice president and chief financial officer Karen Hoguet, during a conference call. She also said inventories are down 5 percent versus a year ago. "The quantity and quality of inventory was in good shape as we entered 2008."

Sales would have been worse except that Bloomingdale's generated comp-store gains and the Internet business, which is on track to break $1 billion in revenues this year, was strong. Dillard's Inc., J.C. Penney Co. Inc., The Bon-Ton Stores Inc. and Kohl's Corp. experienced steeper sales declines than Macy's Inc. "Bloomingdale's did very well relative to upscale competition," Lundgren asserted.

Following successful Bloomingdale's openings over the last couple of years in San Francisco; San Diego; Costa Mesa, Calif.; Chevy Chase, Md., and Chestnut Hill, Mass., "we are looking for real estate sites across the country," Hoguet said. "There aren't 100 of these, but we are aggressively trying to find them."

The brand is noticeably absent from Texas and the Pacific Northwest. Hawaii would be another possibility. Bloomingdale's first Arizona store is scheduled to open in fall 2009 in northeast Phoenix.

For the year, Macy's net profits fell 10.3 percent to $893 million, or $1.97 a diluted share, on a 2.4 percent drop in total sales to $26.31 billion from $26.97 billion. Comp sales dipped 1.3 percent. Stripping away merger costs, tax settlement gains and a gain from a debt offering, 2007 profits rose to $2.15 a share, versus $2.08 the year before.

The May difficulties seem to be easing. "In some markets, former May stores are outperforming Macy legacy stores," Lundgren said. "I think we made a lot of progress on that initiative. We still have more work to do, but it's really become an issue of individual stores in individual markets. It's no longer an issue of former May doors versus Macy legacy doors. There are definite signs of improvement. The gap is closing."

Macy's no longer breaks out results for each.

Lundgren expects the second half of this year to be better than the first, like many other retailers. "Partly it's due to easier comparisons, but it's also related to pent-up demand. I think there will be some by the fourth quarter," he said.

Several factors, including rising fuel costs, the mortgage crisis, the economic stimulus package and the presidential election, make forecasting this year most vexing. "There are a lot of things that are out there. I don't have a crystal ball nor do the economists in Washington," Lundgren said.

As far as Hoguet's outlook: "It's going to be a rocky year."

For 2008, Macy's projects comparable-store sales ranging from down 1 percent to up 1.5 percent and earnings from $1.85 to $2.15 a diluted share, exclusive of onetime costs. The company's objective over time is for a 2 percent-plus comp sales growth and 13 to 14 percent EBITDA.
The company expects improvements in apparel soon, and has a number of strategies cooking, including an exclusive Tommy Hilfiger launch in the fall, as well as two other apparel launches at that time that have yet to be disclosed.

"The apparel business has been challenging in the last several months," Lundgren admitted, whereas he cited handbags, jewelry, shoes and cosmetics as holding up better.

"I think it is a combination of a few things. Part of it is the overall macroeconomic issues we are feeling everywhere. But I do think there has got to be more of a focus on newness and differentiation in apparel. That's definitely something that's been on our minds, and something we have been working on through the back half."

One of the fruits of the labor will be an improved INC offering for spring, Lundgren suggested. The private label is Macy's biggest ready-to-wear brand. "Our design team were very confident they could read the consumers and make sure they didn't get too basic, which they thought they did last fall. They made sure they injected fashion and choices for outfitting options. So far the customer is responding. Even in a challenging environment, the right fashion will stand up," Lundgren said.

Hoguet said Macy's will be launching a new spring TV campaign: "The concept is to reinforce that Macy's is a destination for fashion brands that is backed by some of the most-watched celebrities. Our brand marketing will continue to be balanced with promotional marketing." Advertising expenditures and the promotion schedule are seen as even with last year, Hoguet said.

Also for fall, Lundgren noted: "We have some smaller launches of fragrance and the like, and we are working on a couple of big things that we are not prepared to talk about [yet]. It's apparel related."

On the home front, Hoguet said: "The Martha Stewart launch was successful. The product not only sold well, but also we believe the launch generated traffic throughout the store by adding excitement in our home floors."

Earlier this month, Macy's announced a major consolidation of regional headquarters from seven down to four and a reduction of 2,550 staffers. "We expect these consolidations will help us make big merchandising decisions faster and simplify relationships with vendors," said Lundgren.
Along with that, Lundgren disclosed his localization strategy, which he characterized Tuesday as "my biggest priority." The plan entails establishing district offices supervising 10 stores, instead of previously 16 to 23, so that the company can assort the stores by vendor, sizes and colors at the local level. The strategy also calls for Macy's to devote more resources to product knowledge training, presenting products in a more interesting way on selling floors, and providing better sales coverage. "The objective is to both accelerate sales growth and increase our profitability," Hoguet said.

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