Little advantages have Macy's beating competition

NEW YORK — YORK Macy's Inc. is dominating its competition and bouncing back from the recession by doing many little things well: adding local flavor to its stores, snagging hit exclusives like Madonna's clothing line and keeping its own costs under control.

All that contributed to soaring first-quarter earnings that crushed Wall Street forecasts, a boosted outlook and doubling the dividend it pays shareholders. Macy's stock price rose nearly 8 percent Wednesday.

The department store's results are among the first in a pile of retail earnings reports over the next two weeks. They could put more pressure on competitors like Kohl's Corp. and J.C. Penney Co., both of which cater to shoppers on tighter budgets and are consequently more vulnerable to escalating costs of household basics.

While consumer spending has picked up speed since late last year, middle-to-lower- income shoppers are still cautious, fueling an intense battle among merchants for their dollars.

Macy's Chief Financial Officer Karen Hoguet acknowledged higher gas prices and other issues are starting to make the overall environment more challenging but remained undaunted Macy's would continue to outshine its rivals.

“The momentum ... is building and bodes very well for our future,” Hoguet said on a conference call with investors. “There has been a lot of speculation about how the consumer will react to higher gas prices, price inflation, stagnant housing prices and a myriad of other macroeconomic factors. No one ... knows how this will play out, but ... we have a tremendous amount of ammunition in place.”

Macy's is covering “the retail basics” like faster turnover of goods and better customer service, said Craig R. Johnson, president of Customer Growth Partners, a retail consultancy in New Canaan, Conn. Its exclusive celebrity merchandise which also include Tommy Hilfiger sportswear and Martha Stewart home furnishings also have helped it attract customers.

“The earnings were quite strong, and they are clearly outdistancing the competition,” he said.

Macy's, based in Cincinnati, reported net income of $131 million, or 30 cents per share, in the three months ended April 30, easily beating forecasts for 18 cents per share. That compares with $23 million, or 5 cents per share, in the same period last year.

Revenue rose 5.7 percent to $5.88 billion. Analysts expected $5.89 billion, according to FactSet,

Revenue at stores open at least a year rose 5.4 percent. The measure is a key indicator of a retailer's health because it excludes stores that opened or closed during the year. That compares with a 1.3 percent increase at Kohl's and a 3.8 percent gain at Penney for the latest quarter.

Online revenue for Macy's and Bloomingdale's combined surged 38.3 percent in the first quarter.

Chairman and CEO Terry Lundgren conceived the localization strategy as consumer spending was slowing down in 2007. Stocking more Elvis-themed Christmas ornaments in Tennessee and conservative business suits in Washington, D.C., catered to customers in a way that had been lacking since the chain ditched its numerous regional nameplates such as Marshall Field's and Hecht's in mid-decade.

The benefits started to hit their stride starting late last year after the strategy was put in place nationwide, the company said.

Macy's is also emphasizing exclusive brands such as Material Girl from Madonna and her daughter, Lourdes. The company gets about 43 percent of its revenue from private, exclusive and limited-distribution brands. Hoguet told investors that store-label goods are outperforming national brands.

A better-trained sales force is also helping. Last September, the company trained about 130,000 sales associates and managers on engaging customers, its most comprehensive effort. A big component is more intense coaching of workers by its store and district management teams.

Macy's isn't immune to rising costs and has started to push higher prices through. In some cases, there has been no consumer price resistance to small increases on certain items. In other cases, there's been some pullback, but Macy's had cut the number of units it had ordered based on what it forecast. Hoguet didn't offer any specifics.

The company now expects revenue at stores open at least a year to rise about 4 percent for the rest of fiscal 2011. Combined with actual first-quarter figures, that would calculate to growth of about 4.3 percent for the fiscal year. The previous outlook called for 3 percent.

The company now expects earnings per share between $2.40 and $2.45, compared with $2.25 to $2.30 previously. Analysts had expected $2.34, according to Factset.

Macy's said that based on “the strength, momentum and confidence in our business,” it's doubling its quarterly dividend to 10 cents payable July 1 to shareholders of record June 14.

Shares rose $1.78 per share to $28.11 on the New York Stock Exchange.