Macy's Outpaces, Remains Optimistic


Macy’s Inc. (M), one of the leading department store retailers in the United States, recently posted better-than-expected fourth quarter and fiscal 2011 results on the back of strong holiday season sales, improved operating margin, and effective cost management. The shares of Macy’s jumped $1.51 or 4.2% to $37.76 during the pre-market trading session.

The company exited fiscal 2011 with a bang, and we believe it will sustain the same tempo in 2012. The company’s relentless endeavors to keep itself on the growth trajectory have paid off in an economy, which is fraught with risks. Early hours store openings, huge discounts, promotional activities, and free shipping on online purchases, were enough to lure customers.

Let’s Unveil the Picture

The quarterly earnings of $1.70 per share outperformed the Zacks Consensus Estimate of $1.65, and rose 6.9% from $1.59 earned in the prior-year quarter buoyed by My Macy's localization initiatives, omnichannel integration and robust online sales. The company said that fiscal 2011 earnings registered a growth of 36.5% to $2.88 per share, and came ahead of Zacks Consensus Estimate of $2.82.

On a reported basis, including one-time items, the quarterly earnings came in at $1.74 per share compared with $1.55 in the year-ago quarter. For fiscal 2011, the company posted earnings of $2.92 per share, up from $1.98 in 2010.

The Cincinnati, Ohio-based Macy’s said that total sales grew 5.5% to $8,724 million in the quarter from $8,269 million in the prior-year period, and comfortably surpassed the Zacks Consensus Estimate of $8,696 million. Sales climbed 5.6% to $26,405 million from $25,003 million for fiscal 2011, and outdid the Zacks Consensus Estimate of $26,390 million.

Comparable-store sales for the fourth quarter and fiscal 2011 climbed 5.2% and 5.3%, respectively.

Online sales, which include sales from and, continued to show growth momentum. For the quarter and fiscal 2011, online sales were up 40% and 39.6%, respectively. Online sales favorably impacted comparable-store sales by 1.7% in the fourth quarter and 1.5% in fiscal 2011. The company seeks to expand both Macy's and Bloomingdale's brands online.

Despite a 6.1% increase in cost of sales, gross profit in the quarter climbed 4.7% to $3,573 million, aided by top-line growth. However, Macy’s notified that gross profit margin shriveled 30 basis points to 41%.  Adjusted operating income jumped 7.7% to $1,259 million, whereas operating margin increased 30 basis points to 14.4%.

Stores Update

Macy’s, during fiscal 2011, opened four stores and shuttered 12 outlets. The company now plans to open new Macy’s locations in Salt Lake City and Greendale as well as five new Bloomingdale’s Outlet stores in fiscal 2012.

Other Financial Aspects

Macy’s ended fiscal 2011 with cash and cash equivalents of $2,827 million, long-term debt of $6,655 million, reflecting a debt-to-capitalization ratio of 52.9% and shareholders’ equity of $5,933 million. During fiscal 2011, the company repaid debt of $454 million.

The company during the quarter issued $800 million in new debt, and expects to repay approximately $790 million in the first half of fiscal 2012.

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 fiscal 2011, the company paid dividend of $148 million, and repurchased approximately 16.4 million shares for a total amount of about $500 million. The company bought back approximately 8.2 million shares aggregating approximately $279 million in the fourth quarter. The company at its disposal had approximately $1,352 million of share repurchase authorization as of January 28, 2012. 

Macy’s generated net cash flow of $2,093 million from operating activities in fiscal 2011 compared with $1,506 million in the prior year.

Looking at Guidance

Macy’s has guided fiscal 2012 earnings in the range of $3.25 to $3.30 per share, ahead of the current Zacks Consensus Estimate of $3.23. As a result, we could witness an upswing in the current Zacks Consensus Estimates in the upcoming days with analysts revising their estimates to better align with management’s guidance range.

Macy’s now expects comparable-store sales growth of about 3.5% for fiscal 2012, and anticipates capital expenditures of approximately $850 million for the year.

Let’s Conclude

The U.S. economy is still not out of the woods. Amid such an environment, 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 fourth quarter results and management believes that it will sustain the rhythm in 2012, as the year present enormous opportunity 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.

Macy’s department stores sell a wide range of merchandises. 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) and Saks Incorporated (SKS), currently operates approximately 840 department stores in 45 states, the District of Columbia, Guam and Puerto Rico.

Currently, we have a long-term Outperform rating on the stock. Moreover, Macy’s holds a Zacks #1 Rank that translates into a short-term ‘Strong Buy’ rating, and correlates with our long-term view.

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