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(M) - Get Macy's, Inc. Report

is a standout in the department store sector and heading into the holiday season is poised to be biggest winner of the group.

After a strong back-to-school season, the department store swung to profit in its third quarter from a loss last year, as sales rose. During the quarter, Macy's earned $10 million, or 2 cents a share, compared with a loss of $35 million, or 8 cents, in the year-ago period. Excluding items, the company actually earned 8 cents a share, better than the 3 cents analysts expected.

Macy's CEO Terry Lundgren

Sales grew 6.5% to $5.62 billion from $5.27 billion last year, while same-store sales rose 3.9%. Analysts were calling for revenue of $5.55 billion.

Macy's also upped its outlook for the second-half of the year, and is now forecasting earnings between $1.50 and $1.55 a share, from a prior outlook of $1.45 to $1.50 a share. For the year, Macy's is calling for a profit of between $1.94 and $1.99 a share, compared with a previous guidance of $1.89 to $1.94 a share.

The company's success has predominantly been credited to its My Macy's localization initiative, which has allowed Macy's to better address the needs of shoppers in different parts of the country. But with CEO Terry Lundren at the helm, Macy's has made a much bigger transformation, improving its exclusive private-label offerings and controlling costs.

Read on, as Lundgren discusses the holiday season, the impact of sourcing costs and where retail ranks in the economic recovery.

TheStreet: To what do you attribute Macy's recovery?

Lundgren: Well, we have made a lot of major changes in our company over the last few years and I believe they are taking hold now -- all this work we've done with centralizing the buying and planning, and at the same time creating a district structure, which we call My Macy's, to satisfy the local tastes and needs of our customers in our 800 stores across the country. I think all of that coming together is what's contributing to our positive results.

TheStreet: What's your outlook for the holiday season?

Lundren: We feel very good about the holiday season. In fact, when we announced our strong third-quarter performance, we said that our fourth-quarter sales will be in the 3% to 4% range on a same-store sales basis. So that would be a very good finish to a very strong year.

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Last year, in our case, was slightly less promotional than 2008, but this year will be very similar, in terms of the promotional activities, to last year. It is very important to make sure we always offer great value, but particularly at this time of year. That's an important pillar of the Macy's strategy, to always offer great value. So there will be enough promotional activity to ensure that happens. I'd also say our inventory is in good shape, so we have the right amount of inventory to maximize sales, but there's not the excess of inventory that all retailers had in 2008.

TheStreet: What consumer trends are you seeing?

Lundgren: You are starting to see a return to quality now that we haven't seen for a couple of years. I think for the last couple of years there's been much more emphasis on low price. Consumers want to make sure the product they are buying at any price has a very positive price-value relationship. Whether it's a cashmere sweater at $50 or $60, or whether it's a fashion watch for $225, the most important thing for our customers is they want to know this a good value for the price they are paying.

That seems to be the overriding message we are hearing from consumers. They want product that is going to last, they want a quality product, and they want to know the price they are paying is a fair value. It's no longer what's the cheapest handbag on the floor, or what's the cheapest sweater on the floor.

TheStreet: How will sourcing costs impact Macy's in 2011?

Lundgren: It will definitely be an impact for the fall of next year. It won't be a concern for the first-half of next year, but it will be a concern for the second-half of next year. Fortunately for Macy's, we are seeing with the return to quality that our customers are willing to pay for products they believe will stand the test of time, both in style as well as the quality of the fabrics we use. So we are not going to try to downgrade the product.

I have heard from some retailers that they will hold price points. The only way to hold the price point is to take the quality down. I don't think that's a good strategy for Macy's. Our customer is clearly showing she wants quality in the product. We are going to work very closely with our manufactures. We are one of the largest retailers in America, so we do have very strong relationships with suppliers and manufacturers to ensure that we can accomplish the same price-value relationships in the second half of next year that we have been able to deliver this year and the first half of next year.

Cotton will simply be more expensive then it was a year ago. There is no way around that because of the floods in Afghanistan and supply of cotton being impacted for the fall of next year. I do think we are in a relatively better position than many of our competitors, partially because of the strong relationships with vendors. They are facing many of the same challenges we are discussing here so we are doing this together. When we collaborate as closely as we do, it gives us an opportunity to reduce the cost of doing business together, which will ultimately help the final cost at retail.

TheStreet: Where are we in the retail recovery?

Lundgren: I would say we have definitely made major progress in 2010, but I do think that the only way the recovery is going to be in full swing is when unemployment is at much different levels then it is today. To me, that's the number one subject I try to stay focused on.

The retail industry is the barometer, because the retail and restaurant industry represent one in five jobs in America. I am the chairman at the National Retail Federation also, so I spend a lot of time in Washington discussing this very subject. If there is a job recovery it is very likely that our industry will not only participate, but perhaps lead the way. So we are very sensitive to this.

As consumers show confidence in buying again and a return to quality, this has an impact on retailers' same-store sales growth and continuous improvement. That's what's going to create jobs in America. When that happens at retail it has a positive snowball effect and can help create many jobs in America.

So I do believe that is the most important barometer. When there are more jobs and people feel more confident about keeping the jobs they have, then consumers will be more likely to spend, and when consumers spend that in turn creates more jobs.

--Written by Jeanine Poggi in New York.

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