RealMoney Silver - Macy's: Wait to Shop

Macy's: Wait to Shop
By Scott Rothbort
RealMoney Contributor
5/14/2008 4:10 PM EDT

As Macy's (M) executed better-than-expected results the stock got a little lift. As I mentioned in my preview, however, any move higher would likely be short-covering, and that is what appears to be happening today.

The company is expending time and dollars on its brand consolidation efforts. The strategy has several flaws both with regard to consumer perception and the financial impact to the company. I think it is a big mistake. Furthermore, the company is still absorbing the May purchase while it continues to expand in a weak economy into some of the weaker markets. Lastly, Macy's needs to pay down it big debt load, and I do not see management focused on that aspect of balance sheet discipline.

I just don't see where the company is going. We will only go there when we get that 20% coupon in the mail. Do you think we are the only family that thinks in such a way?

Macy's reported a first-quarter 2008 loss of 14 cents per share on net sales of $5.747 billion. The loss per share includes the impact of one-time items related to costs for the consolidation of the company's three divisions (13 cents after tax) and litigation settlement reserves (3 cents per share). Taking out these items, Macy's would have earned 2 cents per share.

Same-store sales for the quarter declined 2.9%. The strongest region was Texas, with the weakest areas in Florida and on the West Coast. The direct-to-customer business was also strong. Women's apparel was the toughest category, whereas men's wear did relatively better, and home goods were mixed.

Gross margins in the quarter declined year over year by 120 basis points, to 38.6%. Inventory was down 4% for the quarter. SG&A declined $10 million year over year but was higher by 90 basis points vs. sales. SG&A was increased by $33 million for a class action lawsuit in California, which increased SG&A by 40 basis points.

Interest expense was $136 million vs. $125 million a year ago. Macy's received a $47 million tax benefit, which was higher than normal due to a $10 million settlement from California. The company did not buy back any shares during the quarter. Cash provided from operations was $21 million vs. a burn of $370 million in first quarter 2007. Capex of $108 million was significantly less than the $150 million spent a year ago.

Macy's expects the environment to remain challenging through at least the third quarter. Fiscal 2008 comp guidance remains at a negative 1% to negative 1.5%. EPS for the full year is expected to be $1.85 to $2.15, excluding consolidation costs.

For Rothbort's preview heading into the Macy's conference call, please click here.

At the time of publication, Rothbort had no positions in the stocks mentioned, although positions can change at any time.

Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele. He also is the founder and manager of the social networking educational Web site TheFinanceProfessor.com.

Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.

Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.

For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at www.lakeviewasset.com. Scott appreciates your feedback; click here to send him an email.

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