Macy's says 2Q profit falls, cuts outlook for year

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Macy's Inc. posted a lower second-quarter profit Wednesday and warned that its full-year earnings will be below expectations. That, along with a pared-down outlook from a key supplier and a somber government report on retail sales in July, suggests a persistent slowdown for retailers as they face the critical back-to-school and holiday shopping seasons.

Companies reliant on clothing sales — like Macy's and supplier Liz Claiborne Inc. — are having an especially tough time as shoppers focus increasingly on necessities with some exceptions like iPhones. The government's monthly report showed that sales at department stores and other general merchandise stores rose by 0.3 percent last month, just half the 0.6 percent June increase.

"The consumer is still stressed. ... Mall traffic is still down and shows few signs of resuming," said Craig R. Johnson, president of Customer Growth Partners, a retail consulting group, noting that Apple stores at the mall are among the few exceptions. "Back-to-school doesn't mean denims and tops any more. It means iPhones and laptops."

The Macy's and Liz Claiborne results were released as the Commerce Department reported that July's retail sales were the weakest in five months as economic problems from high gas prices to the weaker job market blunted the impact of billions of dollars in government stimulus payments.

Macy's earned $73 million, or 17 cents per share, in the quarter ended Aug. 2, compared with $74 million, or 16 cents per share, a year earlier. Excluding two one-time items, Macy's earned 29 cents per share from continuing operations.

Analysts surveyed by Thomson Reuters had expected earnings of 19 cents per share on revenue of $5.75 billion.

Revenues fell 3 percent to $5.7 billion, while same-store sales, or sales at stores opened at least a year, dropped 2.1 percent. Same-store sales are considered a key indicator of a retailer's health.

The decline was smaller than Kohl's Inc. same-store sales drop of 4.6 percent for the period and J.C. Penney Co.'s 4.3 percent decline, Thomas Weisel Partners analyst Liz Dunn wrote in a note to clients. Both retailers are set to report second-quarter results Thursday.

Macy's is also in good inventory shape: In fact, lower levels of marked-down summer goods hurt sales, but resulted in better-than-expected gross profit margins for the quarter.

"Our organization rose to the challenge and delivered strong second-quarter earnings and cash flow, despite the poor economic environment," said Terry J. Lundgren, Macy's chairman, president and chief executive in a statement. "While we are never fully satisfied when sales are down, we continued to outperform most of our major competitors in same-store sales and to gain market share with a combination of differentiated merchandise, current fashions and great value."

But Macy's clearly faces big challenges. The company — which had seen disappointing sales and resistance from shoppers in some markets, where the Macy's name replaced local favorites — is now tailoring its merchandise to specific areas. That means the concentration of more managers in local markets where they will make more decisions.

Chief Financial Officer Karen Hoguet said those efforts — expected to save $100 million per year — will start to have a significant impact on results this spring.

But Hoguet told investors that with some exceptions such as skinny jeans, the company's mainstay apparel business is expected to remain tough through the remainder of the year.

Liz Claiborne, a key supplier to Macy's with brands such as Juicy Couture and its own namesake label, cut its profit outlook for the full year as it announced that it swung to a loss in the second quarter as its results were hurt by a selloff of some of its brands and an overall sales decline in its department store accounts.

CEO William McComb told investors that women's and men's business under the Liz Claiborne and Claiborne apparel brands were "very poor," though the company is working hard to reinvent the lines. Claiborne has hired designer Isaac Mizrahi to design Claiborne's women's collection, starting for spring deliveries. Trendier labels such as Juicy Couture fared well.

"The retail environment is tough, with traffic reductions in several of our key accounts and outlet stores," McComb said.

Macy's said that it currently expects same-store sales in the fall season to be unchanged at best to down 1 percent, which would result in declines for the year of up to 1.6 percent.

But the company acknowledged that it was difficult to forecast with any level of certainty given the sour consumer confidence, which is at a 16-year low, and the slowing economy. The company said it expects earnings per share for the year to be in a range of $1.70 to $1.85. Analysts had expected $1.86 per share for the full year.

By spring, Lundgren said, sales should see "a positive impact" amid new merchandising initiatives such as Macy's deal to be the exclusive department-store retailer for Tommy Hilfiger U.S.A. men's and women's sportswear and a partnership with FAO Schwarz that will see FAO toy stores in close to 700 Macy's department stores over the next two years.

Macy's shares slipped 39 cents to $20.66. Liz Claiborne's slumped nearly 12 percent, or $1.73, to $13.18.

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