In its most bullish financial report since the recession hit, Macy’s Inc. said Wednesday that first-quarter sales and profits beat expectations and were abetted by strong store traffic and the My Macy’s localization strategy “hitting its stride.”

This story first appeared in the May 13, 2010 issue of WWD. Subscribe Today.

Net income was $23 million versus a loss of $88 million in last year’s quarter. Earnings per diluted share reached 5 cents for the first quarter ended May 1, compared with a loss of 16 cents last year.

Sales totaled $5.57 billion, an increase of 7.2 percent over last year’s $5.2 billion, while comp-store sales rose 5.5 percent. It was Macy’s first quarterly comp increase since the first quarter of 2007, though the chain has posted some monthly comp gains. Gross margins were up 130 basis points to 39.4 percent.

Macy’s raised guidance on April 27 based on strong trends to comp-sale growth of 3 percent to 3.5 percent, instead of an earlier 1 percent to 2 prediction, and EPS of $1.75 to $1.80, compared to previous guidance of $1.55 to $1.60.

While the results Wednesday provided evidence consumers are back spending, Macy’s decided not to further raise guidance saying it was still uncertain about the economy. The company was also cautious on May’s sales due to the timing of Memorial Day pushing results into June, and said younger apparel businesses were not as strong as other categories.

“The momentum from our fourth quarter of 2009 accelerated in the first quarter of 2010. Our first-quarter earnings were well ahead of what we originally expected,” said Terry J. Lundgren, Macy’s Inc. chairman, president and chief executive officer. “We continue to see very positive results from strategic actions taken over the past two years. Today, we are much better able to anticipate and react to customer needs in each location through My Macy’s localization.”

Lundgren added that Macy’s and Bloomingdale’s both had excellent quarters. “They outperformed most of their key competitors,” he said, without specifying. “While the direction of the overall economy remains unclear, we believe we are well-positioned to continue to gain market share,” Lundgren said. “With major changes now behind us, the Macy’s organization has settled in and is hitting its stride in capitalizing on the advantages of My Macy’s.”

Online sales at macys.com and bloomingdales.com were up 34 percent in the quarter.

Operating income totaled $203 million, or 3.6 percent of sales, for the first quarter of 2010, compared with an operating loss of $114 million for the same 2009 period, which included $138 million in division consolidation and store closing costs.

Macy’s operates about 850 department stores, including Bloomingdale’s, and posted $23.5 billion in sales last year.

“We had a great first quarter relative not just to 2009 but to 2008 as well,” said Karen Hoguet, Macy’s chief financial officer, during a conference call. “We are seeing customers coming back to the store quite strongly. Part of it is the economy being stronger than we anticipated, and part of it is things we are doing in the store.”

Hoguet said sales were strongest in men’s wear and home, updated women’s apparel, fashion watches, private brands and exclusives. Sales were less strong in businesses targeting younger age groups, she added, along with many businesses in women’s, such as updated apparel.

Hoguet said Macy’s Herald Square is performing “exceptionally well.” However aside from the flagship, which sources say will soon begin a comprehensive renovation, Macy’s smallest volume stores achieved the biggest increases in the quarter. Macy’s reads that as a sign its My Macy’s strategy is working. Before, small stores “didn’t get the proper attention because they were small,” meaning they were in small markets so their volumes were small or they just underperformed. “Our belief is that My Macy’s actually helps all size stores. It’s just the group that we have had trouble lighting a fire under had been the smaller stores,” she said.

Reacting to Lundgren’s comment on Macy’s and Bloomingdale’s outperforming most of the competition, Craig Johnson, president of Customer Growth Partners, observed Macy’s Inc. trends are ahead of Dillard’s Inc., J.C. Penney Co. Inc. and The Bon-Ton Stores Inc., but trailing those of Kohl’s Corp. and Nordstrom Inc.

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