Macy’s Inc. (M - Analyst Report) posted third-quarter fiscal 2014 results, wherein earnings of 61 cents a share surpassed the Zacks Consensus Estimate of 49 cents, and surged 29.8% from 47 cents earned in the prior-year quarter. Lower cost of sales, fall in selling, general and administrative expenses and share repurchase activity supported the bottom line.

Macy's, Inc - Earnings Surprise | FindTheBest

However, sales fell short of management’s expectation. This Cincinnati, OH-based company and a Zacks Rank #4 (Sell) stock generated sales of $6,195 million that came below the Zacks Consensus Estimate of $6,346 million, and also slid 1.3% year over year. Consequently, management trimmed its sales and earnings forecast.

Despite lower-than-expected sales, management remained upbeat about the fourth quarter because of the upcoming holiday season, Buy Online Pickup in-store initiative and Same Day Delivery program. Moreover, My Macy's localization initiatives, omnichannel integration and magic selling still remained the driving factors. Favorable weather conditions would also boost sales.

Comparable-store sales for the quarter declined 1.4%, while including sales generated from third-party licensed departments, comparable sales fell 0.7%.

Gross profit in the quarter dropped 1.2% year over year to $2,429 million. However, gross profit margin remained flat at 39.2%. Operating income grew 17.2% to $422 million, whereas operating margin expanded 110 basis points to 6.8%.

Store Update

In the quarter under review, the company opened 3 new Macy’s outlets in Sarasota, FL; Las Vegas, NV; and The Bronx in New York City, and shuttered Macy’s stores in Bradenton, FL and York, PA. In Torrance, CA, 3 Macy’s outlets were combined into two. A new Bloomingdale’s replacement outlet was opened in Palo Alto, CA.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $1,048 million, long-term debt of $6,736 million, and shareholders’ equity of $5,351 million.

Macy’s has been actively managing its cash flow, returning much of its free cash to shareholders via dividends or share repurchase activity, and maintaining a healthy balance sheet and credit ratios necessary for an investment-grade rating.

During the quarter, the company bought back approximately 9 million shares for about $534 million. So far in the fiscal year, the company has bought back about 25.3 million shares for approximately $1.48 billion. As of Nov 1, the company had about $1.45 billion at its disposal under the share repurchase authorization.

The company generated net cash flow of $777 million from operating activities in the first three quarters of fiscal 2014 compared with $819 million in the prior-year period.

Guidance

Including sales generated from third-party licensed departments, comparable-store sales are expected to increase between 1.2% and 1.5% (or 0.7% to 1% excluding licensed businesses) in fiscal 2014. Earlier, the company had projected comparable-store sales growth of 2% to 2.5% for the full year (or 1.5% to 2% excluding licensed businesses).

For the fourth quarter, management projects comparable-store sales, including sales generated from third-party licensed departments, to increase by approximately 2% to 3% (1.8% to 2.8% excluding licensed businesses).

Macy’s also lowered its full-year earnings projection to a band of $4.25 to $4.35 per share from $4.40 to $4.50. The current Zacks Consensus Estimate for the fiscal year is $4.41 per share, but could witness a downward movement in the coming days.

Other Stocks to Consider

Better-ranked stocks in the retail sector include Hanesbrands Inc. (HBI - Analyst Report), Gildan Activewear Inc. (GIL - Snapshot Report) and Michael Kors Holdings Ltd. (KORS - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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