Macy's 1Q earnings beat Street view but unchanged outlook disappoints investors

NEW YORK, N.Y. – Macy’s Inc. reported a 38 per cent increase in its first-quarter profit as the department store chain continues to reap benefits from its move to tailor its fashions to local markets.

The earnings beat Wall Street’s expectations. But its shares fell more than 4 per cent in morning trading Wednesday as Macy’s failed to make a conforming boost in its earnings guidance for the year.

That spooked investors who are worried that consumer spending is slowing amid a choppy recovery.

Macy’s, which also operates the upscale Bloomingdale’s chain, said that its net income rose to $181 million, or 43 cents per share, for the three-month period ended April 28. That’s up from $131 million, or 30 cents per share, a year ago.

Revenue rose 4.3 per cent to $6.14 billion from $5.89 billion a year ago.

Analysts surveyed by FactSet had expected earnings of 40 cents per share on revenue of $6.14 billion.

“The momentum in our business at Macy’s and Bloomingdale’s continued to build in the first quarter, with sales and earnings exceeding our expectations going into the year,” Terry J. Lundgren, Macy’s chairman, president and CEO, said in a statement. “The quarterly data clearly demonstrates the strength of our results as we continue to implement our strategies.”

Macy’s is the first in a series of major retailers reporting first-quarter results that should offer clues into consumer spending, which accounts for 70 per cent of U.S. economic activity. Analysts will be carefully studying the reports because the economy is at a critical juncture.

A flurry of economic data has sparked worries over a spring slowdown for the third year in a row. Companies have slowed their hiring in March and April. The stock market has lost momentum as the European debt crisis accelerates. And housing remains weak. April’s sales reports from retailers, including from Macy’s, also showed a pullback from shoppers but warm weather and an early Easter helped to pull sales forward. Analysts believe that May results will offer more clarity on the consumers’ mindset.

Macy’s has been able to deftly navigate its way through the recession and a slow recovery by embracing its own initiatives. The chain has benefited from the strategy Lundgren conceived to tailor merchandise to local markets as consumer spending slowed down in 2007. A better trained sales force also helped. The company has also locked in exclusive brands including its Material Girl fashion collection, created by pop star Madonna and her daughter Lourdes, and Tommy Hilfiger sportswear.

Macy’s revenue at stores open at least a year climbed 4.4 per cent for the quarter, though it had a weak finish to the period. The measure was up 1.2 per cent for April. Rival Kohl’s posted a meagre 0.2 per cent increase for the quarter. J.C. Penney is expected to post a decline for that measure as it is in the midst of overhauling a new pricing strategy, launched Feb. 1. With the pricing strategy, Penney got rid of hundreds of sale events and instead is focusing on everyday prices and deeper promotions that last an entire month.

Investors were hoping that Macy’s would benefit from rival Penney’s period of transition since the new pricing will take time to resonate with shoppers, who are used to racks of discounts. Penney’s pricing strategy is part of an overall transformation spearheaded by its new CEO Ron Johnson.

Still, Macy’s only slightly increased its annual guidance for revenue at stores open at least a year. It now expects that figure to be up 3.7 per cent, compared with its earlier guidance of 3.5 per cent.

Macy’s reaffirmed its earnings guidance for the year of $3.25 to $3.30 per share. Analysts had expected $3.39 per share, according to FactSet.

Macy’s shares fell $1.60, or 4.1 per cent, to $37.91 in morning trading. They peaked for the past year at $42.17 a week ago. They traded as low as $22.66 in mid-August.