Macy's Tops, Ups Outlook - Analyst Blog

Macy's Inc. (M), one of the leading department store retailers in the United States, recently posted third-quarter 2010 results that topped the Zacks expectations. The quarterly earnings of 8 cents a share outperformed the Zacks Consensus Estimate of 3 cents, and rose substantially from a loss of 3 cents delivered in the prior-year quarter.

The Zacks Consensus Estimate remained stable prior to the earnings announcement, in spite of 2 analysts raising their estimates and 4 analysts lowering their projections in the last 30 days.

On a reported basis, including one-time items, quarterly earnings came in at 2 cents a share compared with a loss of 8 cents posted in the year-ago quarter. The shares of Macy's rose 0.8% or 20 cents to $25.42 in pre-market trading.

The company has been taking prudent steps to increase sales, profitability and cash flows, which include integration of operations, consolidation of divisions and customer-centric localization initiatives. To help drive traffic, Macy's continues to focus on price optimization, inventory management and merchandise planning.

The Cincinnati, Ohio-based company – Macy's – said that total sales grew 6.6% to $5,623 million in the third quarter from $5,277 million in the prior-year quarter. Total revenue also comfortably surpassed the Zacks Consensus Revenue Estimate of $5,579 million. Comparable-store sales for the quarter jumped 3.9%.

Online sales, which include macys.com and bloomingdales.com, sustained their growth momentum, and were up 24% in the quarter, favorably impacting comparable-store sales by 0.8%.

Macy's, the operator of about 850 department stores, hinted that it is seeking to expand both the Macy's and Bloomingdale's brands. During the quarter under review, the company opened two new Macy's stores in Palmdale and Tracy, and three new Bloomingdale's Outlet stores. The company also opened a new Bloomingdale's store in Santa Monica.

Despite a 7% increase in cost of sales, gross profit in the quarter climbed 5.9% to $2,246 million, aided by top-line growth. Macy's notified that gross profit margin contracted 20 basis points to 40%. Operating income increased more than two fold to $177 million, whereas operating margin increased 140 basis points to 3.1%.

The better-than-expected third-quarter results prompted management to raise its outlook. Macy's now expects fourth-quarter comparable-store sales to rise in the range of 3% to 4%, which would result in comparable-store sales increase of 3.3% to 4% in the second half of 2010 compared with 3% to 3.5% previously anticipated.

Macy's projected earnings for the second half of 2010 between $1.50 and $1.55 per share, up from the previously provided guidance range of $1.45 to $1.50. Management guided fiscal 2010 earnings in the range of $1.94 to $1.99 per share, ahead of $1.89 to $1.94 predicted earlier. The current Zacks Consensus Estimate of $1.93 for fiscal 2010 lies below the company's current outlook.

Following better-than-expected results and increased guidance, a positive sentiment may be palpable among the analysts covering the stock. Consequently, we could witness a rise in the Zacks Consensus Estimates in the coming days.

Macy's ended the quarter with cash and cash equivalents of $715 million, long-term debt of $6,982 million, reflecting a debt-to-capitalization ratio of 58.8% and shareholders' equity of $4,891 million.

Currently, we have a Neutral rating on Macy's. The Zacks #3 Rank, which translates into a short-term Hold recommendation, also correlates with our long-term view.