Macy’s Sets High Bar for Retail Earnings

by Alyssa Oursler | August 8, 2012 2:42 pm

The usual economic woes may still be weighing on consumer spending, but Macy’s (NYSE:M[1]) sure doesn’t seem to care.

The company posted a strong second quarter[2] today, and shares gained more than 3% this morning as a result. Profits jumped 16%, beating analyst expectations and setting a high bar for the many retailers that will announce earnings in the near future.

Macy’s success, though, isn’t surprising — it has had no problem digging itself out of the financial crisis. Shares of the department store climbed from a low under $6 in 2009 to a price that’s now pushing $40. And the company has seen 10 consecutive quarters of revenue growth and 12 consecutive quarters of earnings growth.

Oh, and in the last year alone, shares have shot up around 60%. I’d say that’s pretty good.

So what’s Macy’s secret? Well, besides the fact that it has benefited from the difficult times competitors like J.C. Penney (NYSE:JCP[3]) and Kohl’s (NYSE:KSS[4]) have had, it also seems to have mastered a simple thing: strategy. And Macy’s has found one that’s working a lot better than Penney’s sad no-sales turnaround[5].

The company owns only Macy’s and Bloomingdale’s stores since closing its Hecht’s and Marshall Field’s stores more than five years ago, and it has been working to improve them ever since. To start, it has successfully been tweaking its offerings. It has a local “My Macy’s” plan, which tailors 15% of the merchandise at each store specifically to that store’s customer demographic. In Washington, D.C., for example, Macy’s sells more conservative business suits than it does elsewhere.

And that’s not all. It also has added countless exclusive brands, including Rachel Ray, Donald Trump and Martha Stewart lines (although Martha may not be exclusive[6] much longer), which set its stores apart. Throw in its recent deal with a Chinese online retailer, and you see a pretty strong foundation. The move gives Macy’s global exposure and builds on the current success of its online operations — which registered 36% sales increase in Q2.

But the boom in profits — going to $279 million, or 67 cents per share, from last year’s $241 million, or 55 cents per share — wasn’t just the result of a boom in sales. Revenue increased only 3%, and same-store sales rose by about the same amount. Instead, the department store also found ways to cut costs and thus increase its margins.

Such sales numbers — although they’re decent — are proof that Macy’s has been facing the same struggles as other retailers. CEO Jerry Lundgren was especially pleased with company’s results[7] since they came “even with challenges that include a soft economy, lower spending by international tourists and temporary disruptions” (including the major renovation of its flagship Manhattan store).

Possibly because of such struggles, Macy’s has also been working to make itself more attractive to investors (as if its recent performance hasn’t been enough). It doubled its dividend[8] near the start of the year, giving it a current yield of 2.1%, and has been busy buying back shares as well.

With all that Macy’s has going for it, plus back-to-school sales around the corner, there’s no reason to think it can’t keep the streak going. Macy’s sure thinks it can: It raised its full-year outlook to EPS between $3.30 and $3.35, up 5 cents from previous estimates and closer to analyst expectations of $3.36.

The main question, instead, is whether its competitors can keep up. The answers will begin rolling in Thursday as Nordstrom (NYSE:JWN[9]), Dillards (NYSE:DDS[10]), J.C. Penney and Kohl’s are all set to report.

For now, though, Macy’s has shown that there’s still strength in the mid-tier retailing world, even in the face of a weak economy.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.

  1. M:
  2. strong second quarter:
  3. JCP:
  4. KSS:
  5. sad no-sales turnaround:
  6. may not be exclusive:
  7. pleased with company’s results:
  8. doubled its dividend:
  9. JWN:
  10. DDS:

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