Macy's Beats, Ups Outlook

Macy’s Inc. (M - Analyst Report) posted better-than-expected second-quarter 2012 results, thereby prompting management to raise fiscal 2012 earnings guidance. The company’s relentless endeavors to keep itself on the growth trajectory have paid off in an economy, which is still not completely out of the woods.

The shares of Macy’s jumped $1.37 or 3.7% to $38.37 during the pre-market trading session.

Let’s Unveil the Picture

The quarterly earnings of 67 cents a share beat the Zacks Consensus Estimate of 64 cents, and soared 22% from 55 cents earned in the prior-year quarter on the back of My Macy's localization initiatives, omnichannel integration, robust online sales and effective cost management.

The Cincinnati, Ohio-based Macy’s said that total sales grew 3% to $6,118 million in the quarter from $5,939 million in the year-ago period, and comfortably surpassed the Zacks Consensus Estimate of $6,100 million. Comparable-store sales for the quarter climbed 3%.

In spite of the macroeconomic headwinds and a temporary suspension in sales due to restoration of flagship stores in New York City, the company continued to perform well in the first half of 2012, and ended it on a winning note with July comparable-store sales rising 4.1%. Moreover, Macy’s met management’s expectations for the spring season.

Online sales, which include sales from macys.com and bloomingdales.com, continued to show growth momentum. For the quarter, online sales were up 36.1%. Online sales favorably impacted comparable-store sales by 1.7%. The company seeks to expand both Macy's and Bloomingdale's brands online.

Despite a 2.8% increase in cost of sales, gross profit in the quarter climbed 3.3% to $2,563 million, aided by top-line growth, whereas gross profit margin expanded 10 basis points to 41.9%. Operating income jumped 9.5% to $554 million, whereas operating margin increased 60 basis points to 9.1%.

Stores Update

Macy’s during the quarter opened two new Bloomingdale’s Outlet stores. Two new Macy’s outlets were opened in the first half of 2012 in the Milwaukee and Salt Lake City areas. The company now plans to open three new Bloomingdale’s Outlet stores and shutter a Macy’s outlet in Santa Ana in the second half of the year.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $1,604 million, long-term debt of $6,637 million, reflecting a debt-to-capitalization ratio of 52.9% and shareholders’ equity of $5,903 million. During the first half of 2012, the company repaid debt of $797 million.

Macy’s has been actively managing its cash flows, returning much of its free cash to shareholders via dividends or share repurchase activity, while maintaining a healthy balance sheet and credit ratios that are necessary for an investment-grade rating. The share repurchases and dividend increasing strategies not only enhance shareholders’ return but also raise the market value of the stock.

During the first-half of 2012, the company paid dividend of $165 million. During the quarter, the company repurchased approximately 10.6 million shares, aggregating about $374 million.

So far in the fiscal year, Macy’s has bought back approximately 16 million shares totaling about $588 million. The company at its disposal had approximately $764 million of share repurchase authorization remaining as of July 28, 2012.

Macy’s generated net cash flow of $638 million from operating activities in the first-half of 2012 compared with $587 million in the year-ago period.

Strolling Through Guidance

Buoyed by Macy’s healthy results management now expects fiscal 2012 earnings between $3.30 and $3.35, up from a range of $3.25 to $3.30 per share forecasted earlier. The current Zacks Consensus Estimate of $3.35 for fiscal year is in line with high-end of the guidance range. However, comparable-store sales growth forecast of about 3.7% for fiscal 2012 was kept unchanged.

Let’s Conclude

The U.S. economy is still not fully recovered. Amid such a scenario, Macy’s has been moving on and keeping its upbeat note. The company’s sound fundamentals across its Macy’s and Bloomingdale’s business is mirrored through strong second quarter results, and management believes that it will sustain the rhythm in 2012, as the year presents enormous opportunities to enhance market share.

In an attempt to increase sales, profitability and cash flows, the company has been taking steps such as integration of operations, consolidation of divisions, customer-centric localization initiatives, as well as developing e-commerce business and online order fulfillment centers. Moreover, Macy’s continues to focus on price optimization, inventory management and merchandise planning to drive traffic.

However, the company’s expansion in regions where it already serves could cannibalize its sales performance and bring down traffic counts at its existing stores in these areas. Consequently, this may have a negative impact on the company’s overall performance. Moreover, a sluggish economic recovery and erratic consumer behavior remain causes for concern.

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.

Macy’s, which competes with J. C. Penney Company Inc. (JCP - Analyst Report), Dillard’s Inc. (DDS - Analyst Report) and Saks Incorporated (SKS - Analyst Report), currently operates approximately 840 department stores in 45 states, the District of Columbia, Guam and Puerto Rico.

Currently, we have a long-term Neutral recommendation on the stock. Moreover, Macy’s holds a Zacks #3 Rank that translates into a short-term Hold rating.