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Macy’s Inc. (M - Analyst Report) posted better-than-expected third-quarter 2012 results, thereby prompting management to raise fiscal 2012 guidance. The company’s relentless endeavors to keep itself on the growth trajectory have paid off in an economy, which still lacks luster. This is the 11th straight quarter that the company has witnessed top and bottom line growth.

Let’s Unveil the Picture

The quarterly earnings of 36 cents a share beat the Zacks Consensus Estimate of 29 cents, and surged 12.5% from 32 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 3.8% to $6,075 million in the quarter from $5,853 million in the year-ago period, and came ahead of the Zacks Consensus Estimate of $6,073 million. Comparable-store sales for the quarter climbed 3.7%.

In spite of the macroeconomic headwinds and Hurricane Sandy, Macy’s remains optimistic about its future performance. Backed by the success witnessed last year, the company will open its stores at midnight on Black Friday. The company will offer block-buster deals, which include lucrative discounts. Besides this, Macy’s will provide its patrons the ease of shopping through smartphones and tablets.

Of late, the retail industry has been experiencing a shift in consumers shopping pattern. Shoppers are spending a sizeable portion of their money to buy essentials and looking for value-adds. Shoppers rank value-for-price as the most important aspect of store purchases. Thus, retailers are coming up with numerous strategic measures as the key holiday season is around the corner.

Coming back to the story, online sales, which include sales from macys.com and bloomingdales.com, continued to show growth momentum. For the quarter, online sales were up 40.4%. Online sales favorably impacted comparable-store sales by 2.2%. The company seeks to expand both Macy's and Bloomingdale's brands online.

Despite a 3.6% increase in cost of sales, gross profit in the quarter climbed 4.1% to $2,403 million, aided by top-line growth, whereas gross profit margin expanded 20 basis points to 39.6%. Operating income jumped 11.7% to $325 million, whereas operating margin increased 40 basis points to 5.4%.

Stores Update

Macy’s opened Bloomingdale’s Outlet stores in Westbury and Grand Prairie during the quarter, and plans to open the third store in Livermore in the fourth quarter. A Macy’s outlet in Santa Ana was shuttered during the quarter and its operation was merged with a full-line Macy’s store in the same mall.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $1,264 million, long-term debt of $6,519 million, reflecting a debt-to-capitalization ratio of 54% and shareholders’ equity of $5,563 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-nine months of fiscal 2012, the company paid dividend of $246 million and repaid debt of $803 million. During the quarter, the company repurchased approximately 10.3 million shares, aggregating about $403 million.

So far in the fiscal year, Macy’s has bought back approximately 26.3 million shares totaling about $991 million. The company at its disposal had approximately $361 million of share repurchase authorization remaining as of October 27, 2012.

Macy’s generated net cash flow of $889 million from operating activities in the first-nine months of 2012 compared with $627 million in the year-ago period.

Strolling Through Guidance

Buoyed by Macy’s healthy results management now expects fiscal 2012 earnings between $3.35 and $3.40, up from a range of $3.30 to $3.35 per share forecasted earlier. For the fourth quarter earnings are projected between $1.94 and $1.99 per share. The current Zacks Consensus Estimates for the fourth quarter and fiscal 2012 are $2.04 and 3.39, respectively.

With the announcement of its October sales results, the company raised its guidance of comparable-store sales for the second half of fiscal 2012. Management now anticipates an augmentation of about 4% in comparable-store sales compared with its earlier guidance of 3.7%. For the fourth quarter and fiscal 2012 comparable-store sales are projected to increase by 4.2% and 3.9%, respectively.

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 are mirrored through strong third quarter results, and management believes that it will sustain the same momentum going forward.

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 , 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 #2 Rank that translates into a short-term Buy rating, and well defines the company’s consistent positive earnings surprise history and an upbeat guidance following stronger-than-anticipated third quarter results.

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