How Madonna’s $35 Tops Make Macy’s Unbeatable: Corporate Finance

Macy’s Inc. (M) is rewarding bondholders with the retail industry’s biggest returns as the most-profitable U.S. department store boosts sales in the face of what may be the weakest holiday shopping season since 2009.

The company’s notes have gained an average 0.7 percent since Black Friday on Nov. 29, the most among non-food retailers in the Bloomberg U.S. Corporate Bond Index. On average, the industry lost 0.03 percent in the same span.

Macy’s Chief Executive Officer Terry Lundgren has bested rivals with the highest operating profit margins after adding exclusive merchandise from celebrities including Madonna and store-label brands such as Bar III, according to debt researcher CreditSights Inc. While retailers brace for holiday sales that researcher ShopperTrak predicts will increase just 2.4 percent, the least since the last recession, Lundgren bolstered demand by using teams to tailor products to local tastes and increased online sales by fulfilling web orders from store inventory.

“If there’s going to be a miss in the holiday season, you’d want to go with the safest player,” James Goldstein, an analyst at CreditSights, who rates the Cincinnati-based company’s debt “outperform,” said in a telephone interview. “In the mid-tier department stores, that’s Macy’s.”

Photographer: Ron Antonelli/Bloomberg

An employee assists a customer at the Macy's Inc. flagship store in New York. Macy’s same-store sales are expected to rise 2.4 percent in the fourth quarter, according to researcher Retail Metrics LLC, compared with declines of 1.3 percent at Kohl’s Corp. and 3.3 percent for Sears Holdings Corp. Close

An employee assists a customer at the Macy's Inc. flagship store in New York. Macy’s... Read More

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Photographer: Ron Antonelli/Bloomberg

An employee assists a customer at the Macy's Inc. flagship store in New York. Macy’s same-store sales are expected to rise 2.4 percent in the fourth quarter, according to researcher Retail Metrics LLC, compared with declines of 1.3 percent at Kohl’s Corp. and 3.3 percent for Sears Holdings Corp.

Sales Rise

The retailer’s 9.7 percent operating margin, a measure of management efficiency, is the highest among department stores over the past 12 months, according to data compiled by Bloomberg, and its 3.3 percent rise in year-on-year sales also leads peers in an industry that’s posted a 1.3 percent average decline, according to Bloomberg Industries data.

Macy’s same-store sales are expected to rise 2.4 percent in the fourth quarter, according to researcher Retail Metrics LLC, compared with declines of 1.3 percent at Kohl’s Corp. (KSS) and 3.3 percent for Sears Holdings Corp. The average retailer is expected to report a 2.1 percent gain in revenue at locations open for at least one year.

Since acquiring May Department Stores Co. in 2005 and creating a national chain under the single nameplate of Macy’s, Lundgren has pushed to develop merchandise that can be found nowhere else. Celebrities from Jessica Simpson to Donald Trump, Sean John Combs and Martha Stewart have provided exclusive lines. Lundgren also has expanded store labels such as Alfani, Charter Club and INC.

Among Madonna’s offerings, the Material Girl Juniors’ Three-Quarter-Sleeve Studded Sweater, marked down to $34.99 from $49, was the best seller among tops yesterday.

Photographer: Peter Foley/Bloomberg

Macy's Chief Executive Officer Terry Lundgren has outdone rivals by concentrating on local tastes with teams that manage at most 20 stores, compared with as many as 200 in 2008, and by integrating store and online inventories, according to Bloomberg Industries. Close

Macy's Chief Executive Officer Terry Lundgren has outdone rivals by concentrating on... Read More

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Photographer: Peter Foley/Bloomberg

Macy's Chief Executive Officer Terry Lundgren has outdone rivals by concentrating on local tastes with teams that manage at most 20 stores, compared with as many as 200 in 2008, and by integrating store and online inventories, according to Bloomberg Industries.

Macy’s also owns the Bloomingdale’s chain.

Unique Labels

Forty-six percent of Macy’s merchandise is store-label, exclusive or limited-distribution goods, up from about 25 percent in 2005, Jim Sluzewski, a Macy’s spokesman, said in an e-mail. He declined to comment on the company’s bond performance.

“I don’t think Macy’s brand portfolio is matched anywhere else,” Poonam Goyal, a Bloomberg Industries retail analyst, said in a telephone interview from Skillman, New Jersey. “Macy’s can serve a Wal-Mart customer and serve a Nordstrom customer.”

Lundgren has outdone rivals by concentrating on local tastes with teams that manage at most 20 stores, compared with as many as 200 in 2008, and by integrating store and online inventories, according to Bloomberg Industries. The retailer that began as a New York dry-goods store in 1858 knows, for example, that its McAllen, Texas, location draws Mexican tourists so it stocks more smaller-sized denim there.

Local Touch

Macy’s is limiting markdowns by selling via the Internet from overstocked retail locations when items run out at distribution centers. Trailing 12-month operating margin, which measures profit per dollar of sales before interest and taxes, is hovering at about the highest level in more than 10 years, Bloomberg data show.

Shares soared almost 10 percent last month after the company reported better profit than analysts had projected thanks to its local selection. The stock has gained 37 percent this year to $52.23, including dividends, compared with a 30 percent rise in the Standard & Poor’s 500 Index. (BUSC)

U.S. department stores will post a 1 percent decline in sales at stores open at least a year in the fourth quarter, according to Retail Metrics, which is based Swampscott, Massachusetts.

Forecasts for lower sales have crimped bond returns for Macy’s competitors. Debt of Menomonee Falls, Wisconsin-based Kohl’s has fallen 0.14 percent and bonds of Edward Lampert- controlled Sears have dropped 1.98 percent since Black Friday.

Credit Upgrades

After extending bond maturities and reducing long-term debt by $1.72 billion since 2010 to $6.73 billion on Nov. 2, Macy’s pays an average 5.88 percent interest on bonds that mature in about 12 years, compared with 6.7 percent on notes maturing in 10 years in January 2010.

Macy’s credit rating has been upgraded four times in the last three years by Standard & Poor’s to BBB+ this month from BB in May 2010. Moody’s Investors Service rates the company two levels below S&P at Baa3, the lowest investment grade.

“Although we forecast a tough holiday season characterized by a reduction in consumer traffic and increased promotional activity, we believe Macy’s will perform ahead of many of its peers,” S&P analysts David Kuntz and Ana Lai wrote in a Dec. 4 statement.

To contact the reporters on this story: Matt Robinson in New York at mrobinson55@bloomberg.net; Cotten Timberlake in Washington at ctimberlake@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Robin Ajello at rajello@bloomberg.net

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