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Macy's Progresses in Home

Admitting that customer demand for home goods remains "less strong than we expected," Macy's Inc. said in the second quarter it nonetheless experienced encouraging customer response and sales in some home categories that were enough to make the department store "feel better about the outlook of our home business than we have in a while," said evp and cfo Karen Hoguet during the department store chain's quarterly earnings call last week.

"Trends in home-related merchandise give us reason to be optimistic that we can improve sales trend in the back half of the year," she said.

Throughout the quarter, business in soft home categories and mattress was stronger, and furniture had "a great month" in July, she said.

Additionally, she said, early sell-throughs were "very encouraging" for the initial Martha Stewart Collection products, which just began rolling out on store floors "in any quantity" toward the end of the quarter. The official launch is Sept. 9.

It will represent the first such line to be included in all of Macy's 850-plus units.

Hoguet noted an "interesting" development in the early Martha Stewart offering: 35% of Macy's bridal registries in July included Martha Stewart products, "and that was without the full assortments on the floor. This demonstrates to us that the customer identifies with the brand, likes the product offering and understands the incredible value that it offers."

These combined home-related improvements give cause to Macy's brighter perspective on its home business, even though customer demand remains mediocre — a "headwind," Hoguet asserted, that will no doubt challenge Macy's in achieving goals, "but hopefully won't prevent us to do so … As we look to fall season, we are somewhat optimistic. We believe we are headed in the right direction, [but] this optimism is tempered by concerns about the health of the consumer."

Another sign of hope during the quarter was the narrowing gap in the performance between legacy Macy's doors and former May Co. stores.

The caveat here is that "obviously sales in the former May Co. doors did continue to be below our expectations," Hoguet said.

Added promotions combined with another year under the company's belt operating those stores as Macy's appears to be helping the business. "We believe this gap will continue to narrow through the fall season but will not disappear entirely," she added.

Other quarterly bright spots were the performances of Bloomingdale's and www.Macys.com.

"The upscale customer segment still appears to be strong, and I don't think we know yet just how big the potential is for Macys.com," Hoguet said. "It is very encouraging."

Macy's has focused its internet site investments mainly on site functionality and back-end distribution capabilities to support it, she said. Marketing is part of the investment equation, "but it's been more about making the [online] experience better for our customer."

In terms of product categories available and sold online, home products are higher on macys.com as the percent of the store, "and you'd expect that because it's easier to buy [these good s] online than to buy them at store." She did not know that exact number, when asked by an analyst, but did say it is not "of a magnitude of 50%."

But despite the chairman Terry Lundgren's vow that the business "can and will improve in the second half," Macy's Inc. lowered its full year guidance after putting up a 77% profit decline on a 1.7% sales decrease during the second quarter ended Aug. 4.

Macy's Inc. now expects earnings per diluted share — excluding merger integration costs, to run between $2.15 to $2.30. Merger costs for the year are expected to total from $150 million to $160 million. The company anticipates full-year sales of $25.5 billion to $26.8 billion, with comps ranging from down 1% to up 0.5%.

MACY'S, INC.

Qtr. 8/4 (x000) 2007 2006 % change
(loss)
a. Includes $177 million in merger integration costs and related merchandise inventory adjustments as well as $191 million in gains on the sale of credit receivables. In addition, last year's second quarter benefited from a tax refund that reduced income tax expense by approximately $80 million and interest expense by approximately $17 million.
b. Includes $306 million in merger integration costs and related merchandise inventory adjustments as well as $191 million in gains on the sale of credit receivables. Also includes last year's second quarter tax refund that reduced income tax expense by approximately $80 million and interest expense by approximately $17 million.
Sales $5,892 $5,995 -1.7
Oper. income (EBIT) a 250 422 -40.8
Net income 74 317 -76.7
Per share (diluted) 0.16 0.51 -68.6
Average gross margin 40.5% 39.9%
SG&A expenses (2,038) (2,117)
Six months
Sales $11,813 $11,925 -0.9
Oper. income (EBIT) b 458 442 3.6
Net income 110 265 -58.5
Per share (diluted) d 0.27 0.37 -27.0
Average gross margin 40.1% 39.3%
SG&A expenses (4,151) (4,271)


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