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Sales Troubles Mar Macy's

Shares slip as the retailer cuts guidance and buyout hopes fade.

Updated from 9:15 a.m. EDT

SAN FRANCISCO - Almost a year after the conversion of May Department Stores into the


(M) - Get Macy's Inc Report

brand, the chain still struggles to win over customers.

Macy's on Wednesday posted a second-quarter profit that was sharply lower than its original forecast, and cut its guidance for the full year. The news sent shares to new 52-week lows as the department-store giant grapples with weaker-than-expected sales, particularly at its newly acquired stores, and hopes for a buyout fade.

Macy's second-quarter earnings plunged to $74 million, or 16 cents a share, from $317 million, or 57 cents a share, as the company recorded more charges tied to integrating its 2005 acquisition of May Department Stores.

Excluding charges, Macy's recorded earnings of 29 cents a share. Analysts, on average, projected earnings of 26 cents a share, while the company's own forecast called for earnings of 20 cents to 30 cents a share.

That projection, however, was lower than Macy's original forecast for second-quarter earnings of 35 cents to 45 cents a share. The company slashed its guidance in July following weaker-than-expected June sales.

Sales for the quarter slipped to $5.89 billion from $6 billion last year. Wall Street expected sales of $5.88 billion. Same-store sales, or sales at stores open at least a year, fell 2.6%.

Nonetheless, some analysts seemed forgiving of Macy's in light of its improving sales in the home merchandising category, especially in the midst of a housing slump. The company introduced a line from

Martha Stewart Living


to a limited number of stores last month, and it plans a larger rollout in September.

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KeyBanc upgraded the stock to buy from hold on the belief that the company's merchandising is improving.

"We are optimistic that our business can and will improve in the second half of the year, despite what appears to be a more challenging economic environment," said Macy's Chairman, President and CEO Terry Lundgren in a press release.

Indeed, Macy's still faces a rocky road. The company said it now sees earnings of $2.15 to $2.30 a share, before items, for the full fiscal year. That's below its prior projection of $2.45 to $2.60.

Analysts had an average estimate for full-year earnings of $2.37 a share, according to Thomson Financial.

The company expects earnings per share of 5 cents to 10 cents in the third quarter and $1.70 to $1.80 in the fourth. Analysts had forecast third-quarter earnings of 19 cents a share and fourth-quarter earnings of $1.81 a share.

Macy's, which switched its name from Federated Department Stores on June 1 in an effort to create uniformity for its brand, has had trouble luring customers into May's former stores, which once carried familiar names like Filene's, Hecht's and Marshall Field's. Chief Financial Officer Karen Hoguet said on a conference call that the turnaround has been particularly difficult in Macy's northern division.

Many analysts had expected stronger earnings as the company neared the anniversary date of its conversion of 400 May stores into Macy's, which mostly occurred last September. But Michelle Tan, an analyst for UBS, says Macy's moved too far, too fast to get customers to shift over from May stores.

The company significantly cut back on the promotions that May store customers had been used to. And although these heavy promotions and aggressive pricing are probably what hurt May stores under its old business model, Tan says Macy's could have weaned customers off those expectations more gradually.

Instead, "you essentially ripped out the blanket from under the customers," Tan says of Macy's.

The company is starting to correct the problem by offering more promotions in the fall, although they won't be as steep as they were under May's control.

Tan says she expects Macy's to eventually get where it needs to be, but it will take longer than people thought.

"I don't think they've done permanent damage to their reputation," Tan says. "They did a shock to their system."

Last month, Macy's faced swirling rumors of a leveraged buyout, which Hoguet declined to address on Wednesday's conference call.

The deal talk sent shares of Macy's shooting to as high as $43 in mid-July, but since then the rumors have died down and the stock has slumped. Amid the recent turmoil of the debt-financing markets, observers see an LBO as less plausible given the massive size of Macy's, which has more than 800 stores and a market capitalization of more than $14 billion.

Shares recently were trading at $31.15, down 58 cents, or 1.8%. Earlier, the stock hit a 52-week intraday low of $30.93.