Ryan Fuhrmann, CFA
August 15, 2007
Department-store giant Macy’s (NYSE: M) recently underwent a makeover by acquiring an archrival and rebranding its stores and corporate name, but until it proves it can grow sales under its unified platforms, investors might want to consider shopping elsewhere.
The recent news flow surrounding Macy’s hasn’t been favorable as of late, as it is seeing sales and earnings trends slow. Second-quarter results released this morning confirmed the weakness as total sales fell 1.7% and same-store sales dropped 2.6%. Apparently, the rebranding of the acquired May Department Stores has yet to improve sales, even though it is easier for investors to keep track of the two remaining names in Macy’s and Bloomingdales.
Macy’s is still expected to see cost-cutting benefits from the May acquisition, but merger-related charges are masking any benefits to the bottom line. For the quarter, reported earnings fell to $0.16, but would have been $0.29 when stripping out the charges. It’s still too early to tell for sure, but operating margins look to be moving back up to the 9%-10% range that Macy’s posted before digesting May.
Cash flow trends were even murkier as Macy’s has been selling off overlapping properties as a result of its newly acquired stores. Plus, last year it entered into a complicated transaction where it purchased credit receivables from GE Capital only to sell them off to Citigroup for a nice gain. Again, the company had a solid track record of ample cash flow generation with which to pay down debt, buy back stock, and declare dividends, but recent moves make it hard to predict cash flow trends.
Given the current top-line weakness, it’s also difficult to discern how Macy’s will be able to improve sales once it fully integrates May, and shoppers get over the fact that Marshall Fields and other regional names no longer exist. At current share price levels, I’m partial to archrivals such as Kohl’s (NYSE: KSS) and Nordstrom (NYSE: JWN), becauseÂ they are seeing much stronger sales and profitability trends. Additionally, J.C. Penney (NYSE: JCP) has seen a nice revival of its own, and didn’t even have to go down a messy path by pursuing a major acquisition.
For now, I’ll keep Macy’s in the pile of department-store retailers that need a new sales focus — a groups thatÂ also includes Sears Holdings (Nasdaq: SHLD) and Dillard’s (NYSE: DDS). Certain old-school rivals have learned to compete, and it remains to be seen if Macy’s move to acquire market share will be successful.
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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.