Macy's Report a Mixed Bag

The retailer tops third-quarter profit estimates but cuts its sales forecast.
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Updated from 10:33 a.m. EST

SAN FRANCISCO -- Macy's posted third-quarter results at the high end of its forecast, helped by clean inventory and improvements to its long-flailing home furnishings business.

But the department-store giant also offered a mixed view of the all-important holiday season, cutting its sales projection but backing its fourth-quarter earnings target. Shares were slipping $1.36, or 4.4%, to $29.29.

For the quarter ended Nov. 3, the Cincinnati-based retailer earned $33 million, or 8 cents a share, compared with a year-earlier loss of $3 million, or 1 cent a share. The year-ago results were hit by $90 million in aftertax charges tied to the company's mammoth 2005 acquisition of May Department Stores.

Excluding $17 million in May-related integration charges in the latest quarter, Macy's reported earnings of 10 cents a share, at the top of its projected range of 5 cents to 10 cents. Analysts polled by Thomson Financial expected a profit of 7 cents a share, on average.

The quarter was one of the last to be affected by the rocky integration of the May stores. Chief Financial Officer Karen Hoguet said on a conference call that the fourth quarter would mark the last of the expenses.

Macy's has had trouble attracting customers loyal to the former May stores, which carried venerable names like Filene's, Hecht's and Marshall Fields before they were converted to the Macy's nameplate.

Hoguet said the gap between sales at former May stores and legacy Macy's stores is continuing to narrow as customers show more willingness to shop at both.

"We're feeling much better about the performance of May stores," she said on the conference call.

Michelle Tan, an analyst for UBS, says Macy's has now done a better job of offering merchandise to generate more traffic to its stores.

For instance, the company in September introduced a home-goods collection from its licensing deal with

Martha Stewart Living Omnimedia

(MSO)

. That gave a boost to Macy's home furnishings business, a category that has been dragging since 2004.

Also, beginning in the fall of 2008, Macy's will be the exclusive retailer for Tommy Hilfiger men's and women's sportswear in the U.S.

Tan says Macy's has also been able to keep its inventories clean, which was especially important during the unseasonably warm fall months.

Nonetheless, the company still faces challenges as it tries to turn itself around during a tough retail climate. For the third quarter, Macy's sales edged up just 0.3% to $5.91 billion. Same-store sales, or sales at stores open at least a year, slipped 0.8% from a year earlier.

Third-quarter sales were tough for retailers across the board as warmer-than-average temperatures hit the U.S. in September and October, cutting into demand for fall items like sweaters and boots. As well, signs are emerging that the U.S. housing downturn is spreading to consumer spending, causing shoppers to tighten their purse strings.

Against this backdrop, holiday sales are widely expected to be lackluster. Macy's said it now expects fourth-quarter sales of $8.7 billion to $8.9 billion, lower than its August projection of $8.8 billion to $9 billion. Wall Street anticipates sales of $8.91 billion.

The company projects same-store sales will be down 2% to up 1%, compared with its prior projection of flat to up 2%.

But Macy's still expects fourth-quarter earnings in the range of $1.70 to $1.80 a share, bracketing analysts' average estimate of $1.74. The guidance excludes merger integration charges.

For the year, Macy's anticipates sales of $26.4 billion to $26.6 billion, slightly below its earlier forecast of $26.5 billion to $26.8 billion.