Macy's Profits Beat Forecasts; Coming Soon: Bloomingdale's Outlets

Macy's (M) let investors know that its retail life is getting back to some sort of normal in 2010, as it reported improved results for the fourth quarter Tuesday. Looking forward, the parent company of Bloomingdale's also expects to benefit as it comes to the end of a long period of charges and disruption associated with its efforts to pull its many department store brands together under the Macy's and Bloomingdale's names.The department store chain reported net income of $466 million in the fourth quarter, compared to a loss of $4.77 billion for the same period in 2008, due to a series of accounting charges and store closings. For the year, Macy's posted net income of $350 million, or 83 cents per share, compared to a loss of $4.8 billion in 2008. Macy's seemed eager to tout the news; it moved its conference call later to avoid overlapping Target's (TGT) investor call.

Macy's has been in recovery mode since before the recession, struggling to absorb regional department stores it acquired in the merger of May Co. with Macy's predecessor, Federated Department Stores. Last year, the retailer launched its My Macy's strategy, meant to localize the selection in stores and give store management more flexibility and control over inventory and operations.

The strategy has paid off, said CEO Terry Lundgren, who made a rare appearance on the analysts' conference call. Lundgren and CFO Karen Hoguet said the regions and stores where My Macy's has been implemented clearly show better results than average.

Macy's used 2009 to implement organizational changes: "Our priority in 2010 is to keep refining what we learned," said Lundgren.

Adjusted Earnings Beat Analysts' Estimates

My Macy's is now moving out of the pilot stage, and the charges involved in consolidating store operations are over with the end of the fiscal year, said Hoguet. She noted that Macy's gross margin rate rose by 2.4 percentage points in the fourth quarter compared to the same period a year ago, and it's even 0.1 percentage points higher than the fourth quarter of 2007.

Macy's fourth-quarter earnings per share of $1.10 were less than the $1.31 analysts had expected, but after factoring out several one-time charges -- including tax charges and the cost of closing five stores in January -- adjusted earnings of $1.40 per share beat the analysts' consensus estimate. That was also better than Macy's initial forecast of $1.35 to $1.37, upgraded after better than expected January sales.

Comparable sales for the fourth quarter were down 0.8% from a year earlier, and 2009 sales were down 5.3% from 2008. Online sales continued to be the bright spot, with an increase of 26.6% in the fourth quarter and 19.6% for the year, which management calculated added 0.7 percentage points to the quarterly sales growth rate and 0.6 points to the year's results.

Improved Customer Loyalty Program Planned

While department stores seem poised to make a sales comeback this year, Macy's management was modest in its forecast. Comparable sales are expected to rise 1% to 2% this year, and earnings will rise to $1.55 to $1.60 per share in 2010.

The sales improvement will come from a combination of increased store traffic and rising prices, said Hoguet. She noted that while average sale price remained flat year-over-year, the prices at Bloomingdale's rose during the fourth quarter.

"We're seeing customers willing to buy brands that are better as long as the price relationship is fair," she said.

But Macy's will still work on offers to increase that value, said Lundgren. He noted the company is working on a new customer loyalty program that goes beyond what its Star Rewards offers. Macy's is looking beyond retail to other industries for ideas about fashioning that program, and will experiment with it during the first half of the year, he said.

CEO Optimistic About Outlet Stores

Macy's will also go after the outlet shopper demographic with the launch of Bloomingdale's outlet stores. Lundgren said the company was coming late to that segment because it had been focused on acquisitions and their integration for the last five years. But Lundgren said rivals such as Nordstrom's (JWN) Rack and Saks' (SKS) Off Fifth have proved the strategy can work, so Macy's could expand it quickly beyond its first four store openings, as soon as it figures out what works in that channel. That could take as little as six to 12 months, he added.

"This is not a strategy that I need to worry if it will work," Lundgren said.

With all the enthusiasm about this year, Macy's is still being cautious in its outlook. Lundgren explained that, even while business is unquestionably better, some of the big issues in the economy -- including high unemployment and a weak housing market -- remain a concern.

"Of course, I do worry about some of the macroeconomic issues," said Lundgren. "I'm not going to bury those ideas and play ostrich."
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