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Home Shaping Up at Macy's

Macy's is "encouraged" by the recent strengthening of its home business, not just at its legacy doors but especially at former May Co. units where home was "the biggest weakness" last year.

During its third-quarter conference call, the 850-unit department store chain attributed "a confluence of factors" to home's turnaround. Evp and cfo Karen Hoguet outlined them as: the Martha Stewart launch two months ago; the introduction of big-ticket business on Macys.com; improved localization of assortments; and improved marketing, including internet advertising.

While Macy's shared neither statistics nor product specifics on the progress of its Martha Stewart Collection thus far, Hoguet said the program is credited with not only performing well on its own merit but also with driving traffic to Macy's home department, even "perhaps other parts of the store," and has been a catalyst in aiding Macy's overall home business.

On the localization of assortments aspect, Macy's has stepped up its efforts to differentiate its offerings store by store, based on market needs, since centralizing its home business three years ago. "It is three years into the process, but we are feeling really good about it now," said Hoguet.

Related to this is a new store-wide project, which is already underway at the home division, titled "My Macy's" that is focused on tailoring assortments unit by unit. "We're trying to better localize assortments and get more of what's selling and less of what's not and trying to react," she said. "The better product and more differentiated product is what is selling everywhere. We just need to continue to refine it. It will happen."

The company reported third-quarter net income of $33 million, breaking into the black ink compared to last year's third-quarter net loss of $3 million. Sales of $5.91 billion were essentially flat compared with last year's $5.89 billion.

Gross margin, at 39.3% of sales, was down 100 basis points from 40.3% a year ago, while SG&A costs crept up 30 basis points to 35.9% from 35.6% of sales.

While generally on track with earlier projections, Macy's is now projecting full year 2007 same-store sales down 1.3% to down 0.3%, a marked difference from its guidance three months ago, which had full year comps pegged at down 1.0% to up 0.5%. Against 2006 sales of $27 billion, Macy's now projects 2007 sales of $26.4 billion to $26.6 billion.

The company still plans to hit its earlier fourth-quarter profit projection: earnings per diluted share are aimed from $1.70 to $1.80.

For this holiday selling season, Macy's expects brightness. Inventories are in "good shape and well positioned for fourth quarter, both in quantity and quality," Hoguet said. Responding to an analyst question, she added, "Holiday seasons are always promotional, so I don't expect there to be a dramatic change from last year."

Another analyst asked about looming hikes in cost of goods sold and inflationary pressures on buyers for the upcoming quarter and the spring. "It is a subject we're talking about more and more but so far have not seen it reflected in orders for the spring," Hoguet said. "But we are talking about it more as a potential subject."

Macy's, Inc.

Qtr. 11/3 ($ millions) 2007 2006 % change
(loss)
a. Operating income reflects May Co. integration costs of $17 million in 3Q 2007 and $117 million in 3Q 2006.
b. Net income for 3Q 2007 includes approximately $10 million in tax benefits related to adjustment or settlement of various tax issues.
c. Includes loss on disposal of the Lord & Taylor division of $63 million on a pre-tax basis, or $38 million after income taxes, or $.07 per diluted share.
d. Per share income includes May integration costs and related inventory valuation adjustments for 3Q 2007 and 3Q 2006 of $0.02 and $0.17 respectively.
e. Operating income reflects May Co. integration costs of $150 million in 2007 and $283 million in 2006.
f. Income tax expense reflects $10 million in tax benefits for 2007, and $80 million in 2006.
g. Per share income includes May integration costs and related inventory valuation adjustments for 2007 and 2006 of $0.20 and $0.50 respectively.
Sales $5,906 $5,886 0.3%
Oper. Income (EBIT) 183a 134a 36.6
Net income 33b (3)c
Per share (diluted) 0.08d 0.03c,d 166.7
Average gross margin 39.3% 40.3%
SG&A expenses 35.9% 35.6%
Nine months
Sales $17,719 $17,811 (0.5)%
Oper. Income (EBIT) 641e 576e 11.3
Net income 143f 262f (45.4)
Per share (diluted) 0.35g 0.41g (14.6)
Average gross margin 39.9% 40.4%
SG&A expenses 35.4% 35.8%


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