(M) Macy’s Analyst Maintains Neutral on Shares

Macy’s Inc.’s (M) constant focus on price optimization, inventory management, merchandise planning and private label offering positions it to drive traffic, meet customer-oriented demand and improve in-store shopping experience.

We remain optimistic about the company’s customer-centric localization initiative called ‘My Macy’s.’ The program aims at improving comparable-store sales and reducing operating expenses, with stores and merchandise assortments focusing on local customer needs and preferences.

These help the company to deliver better-than-expected second-quarter 2011 results on the heels of healthy sales, improved operating margin and effective cost management. The quarterly earnings of 55 cents a share outperformed the Zacks Consensus Estimate of 47 cents, and jumped 57.1% from 35 cents earned in the prior-year quarter.

Macy’s now guided fiscal 2011 earnings in the range of $2.60 to $2.65 per share, up from $2.40 to $2.45 forecasted earlier.

Macy’s said that total sales grew 7.3% to $5,939 million in the quarter from $5,537 million delivered in the prior-year period. Total revenue also came well ahead of the Zacks Consensus Estimate of $5,881 million. Comparable-store sales for the quarter climbed 6.4% and fared better than the company’s projection of 6%.

Management now expects comparable-store sales growth between 4.8% and 5.1% for fiscal 2011, up from 4.8% previously projected.

Macy’s department stores sell a wide range of merchandise. Its products include men’s, women’s and children’s apparel and accessories, cosmetics, home furnishings and other consumer goods.

Macy’s is also seeking to expand both the Macy’s and Bloomingdale’s brands. Online sales, which include macys.com and bloomingdales.com, sustained their growth momentum, and were up 40.2% in the quarter, favorably impacting comparable-store sales by 1.2%.

However, intense competition, a sluggish economic environment and higher debt-to-capitalization ratio still remain causes for concern. The company ended second-quarter 2011 with a long-term debt of $6,162 million, representing a debt-to-capitalization ratio of 50.8%, which is substantially higher, and could adversely affect its credit worthiness and make it more susceptible to competition.

Moreover, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn the company’s growth and profitability.

Macy’s, which competes with J.C. Penney Company Inc. (JCP) and Dillard’s Inc. (DDS), currently operates approximately 850 department stores in 45 states, covering the District of Columbia, Guam and Puerto Rico.

Currently, we have a Neutral rating on the stock. However, Macy’s holds a Zacks #1 Rank, which translates into a short-term Strong Buy rating, and correlates with our long-term recommendation.

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