Silver Lining in a Volatile Economic Climate: Macy’s Profits Usher in Holiday Cheer

US shoppers expected to spend 3.9% more on gifts this year

Macy’s Inc. (NYSE:M)earned 47 cents a share in the third quarter ended October 2013, a 31% jump from the year-ago period, and exceeding analysts’ estimate of 39 cents. The retailer’sprofit jumped 22% to $177 million as sales grew 3.3% to $6.28 billion, beating projections of $6.19 billion. Comparable sales (Comps) rose by 3.5%during the quarter, andtogether with sales from departments licensed to third parties, sales grew by 4.6%. Also worth noting is Macy’s announcement that discounts and high decibel advertising had improved business during its third quarter.

In a press release dated 13 November, Cincinnati-based Macy’simproved sales performance is mainly attributed to the successful execution of three key strategies: My Macy’s localization, Omni channel integration, and Magic Selling customer engagement. In addition, business during the third quarter benefitted from intensified marketing strategies to emphasize the outstanding value in merchandise deliveries, according to Terry J. Lundgren, Chairman, President and CEO of Macy’s. He added that both Macy’s and Bloomingdale’s performed well during the quarter, and witnessedan improvement in the sales trend in every region of the country compared with the spring season.

Adding to the cheer, Macy’s operating income totaled $360 million, or 5.7% of sales, during Q3, compared with operating income of $325 million, or 5.4% of sales, for the same period last year. The company stated that sales surged on the back of promotions, and its business was showing promise ahead of the crucial holiday season.

Domino Effect on Key Indexes

Riding on strong results, Macy’s stock shot up 9.39% to $50.68, after touching a 52-week high of $50.95 on Wednesday, 14 November. This had a domino effect on key indexes, driving the S&P Consumer Discretionary Sector Index up 1.24%. The Dow Jones Industrial average was up 70.96 points, or 0.45%, at 15,821.63. Following the upward trend, the Standard & Poor’s 500 Index was up 14.31 points, or 0.81%, at 1,782. In addition, the Nasdaq Composite Index was up 45.66 points, or 1.16%, at 3,965.58.

Macy’s stock movement w.r.t. the S&P Consumer Discretionary Index and the Dow Jones Industrial Averages over the last three days is shown below:

Source: Bloomberg
Source: Bloomberg

What’s in Store This Holiday Season?

According to a recent survey from the National Retail Federation (NRF), US shoppers are expected to spend 3.9% more on gifts this year, despite the sluggish economic backdrop. As shown in the chart above, historically around 20% of the annual retail sales are generated during the holidays and this trend is likely to continue or get even stronger during the upcoming holiday season. What is more, Karen Hoguet, Macy’s CFO, in yesterday’s earnings call, cited three trends that bode well for the holiday season. Traditional gift categories, such as jewelry and cashmere, were selling well. Sales of cold-weather goods, such as boots and sweaters, as well aswomen’s apparel were also strong.

The sales forecast by NRF for 2013 and trends of holiday sales contribution to the overall industry sales are shown below:

Source: NRF, US Department of Commerce data
Source: NRF, US Department of Commerce data
Source: NRF, US Department of Commerce data
Source: NRF, US Department of Commerce data

Consumer Spending Augurs Well for Retail Industry

Industry experts viewed Macy’s results as a sign that holiday shoppers will spend more money.On another note, Wal-Mart Stores Inc., the largest US retailer, is set to report earnings on Thursday, 14 November, providing a broader insight into the economy, and more importantly into the health of discretionary spending/ consumer confidence.Last week, Gap Inc. (GPS.N), Victoria’s Secret parent company L Brands Inc. (LTD.N), and J.C. Penney Co. Inc. (JCP.N) reported stronger sales for October as opposed to the months ofAugust and September 2013. While most retailers aim to see higher sales during the upcoming key holiday period, the question remains whether or not the ongoing positive consumer sentiment will be sufficient to propel the economy towards a more sustained and healthy pace in 2014.

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