Bullish on Macy's

Macy’s Inc.’s (M - Analyst Report) growth momentum continued throughout the year, and we believe it will sustain the tempo as it enters 2012. The company’s persistent effort to keep itself on the growth trajectory has paid off in an economy, whose turmoil seems to have no end. 

Initiatives Taken

Macy’s sustained focus on price optimization, inventory management, merchandise planning and private label offering, positions it to drive traffic, meet customer-oriented demand and improve the shopping experience.

In an attempt to increase sales, profitability and cash flows, the company has been taking steps such as integration of operations, consolidation of divisions as well as developing the e-commerce business and online order fulfillment centers.

We remain optimistic about the company’s customer-centric localization initiative called “My Macy’s.” The program aims at improving comparable-store sales and reducing operating expenses, with stores and merchandise assortments focused on local customer needs and preferences.

Macy’s for the first time opened its stores at the stroke of midnight on Black Friday to attract customers, and saw its comparable-store sales rise 4.8% for the four-week period ended November 27, 2011 that fared better than analysts expected.

Efforts Reap Results

Macy’s sustained efforts to lift itself were reflected in the recently reported quarter. The company posted third-quarter 2011 results that outpaced the Zacks’ expectations on the back of healthy sales, an improved operating margin and effective cost management.

The quarterly earnings of 32 cents a share were double that of the Zacks Consensus Estimate, and portrayed a fourfold increase from 8 cents in the prior-year quarter buoyed by My Macy's localization initiatives, omnichannel integration and robust online sales.

Macy’s said that total sales grew 4.1% to $5,853 million in the quarter from $5,623 million delivered in the prior-year period. Online sales, which include macys.com and bloomingdales.com, continued to grow, and were up 39.8%, favorably impacting comparable-store sales by 1.5%. Management seeks to expand both Macy's and Bloomingdale's.

Results Favor Outlook

Persistence has paid off and in turn led to a favorable outlook. Macy’s better-than-expected results prompted management to raise its full-year earnings projection.

Management guided fiscal 2011 earnings in the range of $2.70 to $2.75 per share, up from $2.60 to $2.65 projected earlier. For the fourth quarter, earnings are forecast between $1.52 and $1.57 per share.

Macy’s reiterated comps to increase between 4% and 4.5% in the fourth quarter, and hinted that should the November sales trend continue the company could surpass its own guidance range.

Let’s Wrap Up

Macy’s department stores sell a wide range of merchandise. Its products include men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods.

After the Black Friday sales blast, there is skepticism in the market about whether the success of weekend sales will be replicated during Christmas and New Year, or more specifically whether consumers who have now become more rational about spending will tighten their purses.

However, the efforts of retailers to convert store traffic into business cannot be decried as they are trying to lure customers. However, who emerges successful in wooing consumers in this distressed economy is an unfolding story. Given the track record, we however, believe that Macy’s appears to be one of the frontrunners.

Macy’s, which competes with J. C. Penney Company Inc. (JCP - Analyst Report) and Dillard’s Inc. (DDS - Analyst Report), currently operates approximately 850 department stores in 45 states, the District of Columbia, Guam and Puerto Rico.

The above analysis supports our affirmative view on the stock, and therefore we retain our Outperform recommendation on Macy’s. Moreover, Macy’s holds a Zacks #1 Rank, which translates into a short-term Strong Buy rating, and correlates with our long-term view.

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