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On Sep 27, we downgraded our long-term recommendation on Macy’s Inc. (M - Analyst Report) to Underperform based on the company’s dismal second-quarter fiscal 2013 performance. The stock currently carries a Zacks Rank #4 (Sell).

Why the Downgrade?

Estimates for Macy’s have shown a downtrend since the company reported disappointing second-quarter results on Aug 14, 2013. The company posted lower-than-expected results as consumers’ cautious attitude toward making any discretionary purchases resulted in soft sales. Moreover, the offered discounts hurt margins. As a result, management trimmed its comparable sales and earnings outlook.

The quarterly earnings of 72 cents a share missed the Zacks Consensus Estimate of 78 cents. However, the quarterly earnings registered year-over-year growth of 7.5%. Total sales edged down 0.8% to $6,066 million in the quarter but fell short of the Zacks Consensus Estimate of $6,246 million. Comparable-store sales for the quarter also slipped 0.8%.

Following soft results, Macy’s now anticipates comparable-store sales growth of 2% to 2.9% for fiscal 2013. Management now forecasts full-year earnings in the band of $3.80 to $3.90 per share. Earlier, the company had envisioned comps growth of 3.5% and earnings between $3.90 and $3.95 per share for the fiscal year.  

Consequently, we are witnessing a fall in the Zacks Consensus Estimate, as analysts become less constructive on the stock’s future performance. The Zacks Consensus Estimate for fiscal 2013 fell by 3% to $3.83 and for fiscal 2014 it tumbled by 4.2% to $4.30 per share, over the past 60 days.

Going forward, management remained optimistic of capturing incremental sales opportunities with its fresh inventory along with My Macy's localization initiatives, omnichannel integration and Magic Selling. However, we would prefer to wait and see if the efforts show some positive results.

Other Stocks That Warrant a Look

Other stocks worth considering in the retail sector include Citi Trends, Inc. (CTRN - Analyst Report) and Lumber Liquidators Holdings, Inc. (LL - Snapshot Report) both sporting a Zacks Rank #1 (Strong Buy), while Fortune Brands Home & Security, Inc. (FBHS - Snapshot Report) holds a Zacks Rank #2 (Buy).

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