Macy’s: Spending Environment to Remain Soft

Macy’s Inc. (M), which operates both Macy’s and Bloomingdale’s department stores, reported fourth quarter profits of $1.40 per share when excluding one-time items. The results were slightly ahead of analysts’ estimates. Revenue came in around $7.85 billion a decline of 1.1%, but a bit better than expectations. Same store sales declined just .8% with improving sales trends in the last two months of the fiscal year. The retailer attributed the better than expected results to cost controls, the My Macy’s local merchandising initiative, and better sales both online and at Bloomingdale’s. In the fourth quarter of last year, Macy’s reported a loss of $4.77 billion or $11.33 per share, so the past quarter was a huge improvement.

For the year ahead, Macy’s management issued a warning about continued weakness for consumer spending, but they do believe there is an opportunity to increase market share. This lackluster spending environment caused Macy’s to forecast earnings in-line with expectations despite impressive fourth quarter results; for fiscal 2011 they expect EPS of $1.55 to $1.60. Comparable store sales are seen rising by 1% to 2%, which would be a welcome change from the consistent declines seen over the last year.

With household balance sheets still extremely strained and unemployment continuing to climb month by month, it is no mystery why consumer confidence remains weak. In many cases, the odds are stacked against businesses that rely upon consumer spending. Macy’s has actively combated this tough environment through the My Macy’s push, which allows store managers to stock stores with items that will have more appeal to their local market. Additionally, they are also growing their discount outlet locations for the Bloomingdale’s brand, in order to attract even the most price conscious shoppers. The initial results have been quite encouraging as a 3.4% increase in same store sales in January.

In a generally poor day in the market, Macy’s strong quarter has the stock trading slightly higher. There is no doubt that Macy’s fourth quarter showed significant improvement from the period a year ago, but we do have concerns over the current valuation. Last week, we downgraded M to Overvalued from our Fairly Valued stance because, according to our methodology, the stock has advanced too far, too fast. The stock has doubled over the last twelve months and nearly tripled off of their lows, which may be justified but does not make it a great pick for value investors. Macy’s management team is doing a reasonably good job of executing in a tough environment, but they acknowledge that the difficult environment is not going away anytime soon.

Macy’s: Spending Environment to Remain Soft

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