Macy's Surprising Q3 Strength Lifts Confidence In Its Guidance

Investor's Business Daily

Macy's (M) sprinkled some pre-holiday cheer into the retail industry Wednesday as third-quarter earnings came in well above estimates, sending shares to a new high.

The Cincinnati-based operator of its namesake and Bloomingdale's stores earned 47 cents a share, up 31% vs. a year earlier and 8 cents over analyst views. Revenue rose 3% to $6.28 billion, also topping.

Same-store sales grew 3.5%, above forecasts for 2.1%. Including licensed sales, comps rose 4.6% vs. 2.4% in the first half of the year. Macy's switched certain businesses, including athletic shoes, into licensed departments, with partners such as Finish Line (FINL) and Sunglass Hut.

The comps data imply a 20%-plus gain in licensed departments, Stifel Nicolaus analyst Richard Jaffe says, which suggests a boost in traffic and storewide transactions.

"If you go in to buy a pair of Nike (NKE) sneakers, will you stop to buy athletic wear or a T-shirt?" Jaffe said. "Sneakers are not the only purchase. If they get you to Macy's, all the better.

Macy's shares rose 9% to 50.68, hitting a record 50.95 intraday.

The Ohio chain said promotions helped boost business, and sales trends improved across the country vs. the spring season. Gross margins narrowed to 39.2% from 39.6% as it builds its multi-channel business.

For instance, it offered free delivery to compete in the lower-margin online business.

"It's no longer the Sunday newspaper insert to drive traffic," Jaffe said. "They're using all kinds of media more effectively than ever, whether it's online or social media.

Macy's reiterated its full-year guidance for EPS of $3.80-$3.90 on a 2%-2.9% sales gain. Analysts expect $3.78 on a 1% climb in sales.

The retailer's target implies Q4 EPS of $2.06-$2.22, with the midpoint matching views for $2.14.

"They're well-positioned (for the holiday season)," Jaffe said. "They've demonstrated an ability to drive traffic, increase transactions, and make the business happen and happen profitably, so they're looking pretty good.

Stronger October sales are the underlying theme as Gap (GPS), J.C. Penney (JCP), L Brands (LTD) and others last week reported better-than-expected same-store sales. Despite the government shutdown, overall comps rose 4% last month, Retail Metrics said.

Macy's will open Thanksgiving evening for the first time, as more retailers begin holiday sales ahead of Black Friday.

Retailers might get an added lift with gas prices at two-year lows, fattening shoppers' wallets.

Among other big chains, Kohl's (KSS) and Wal-Mart (WMT) report Thursday ahead of the bell, while Nordstrom (JWN) is on deck after the close.

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