While the story told by the financial media is that retail is in bad shape, there is an increasing amount of news that suggests, for some, the opposite is true. It's fair to say that many large chains are struggling with a soft consumer environment, but Macy's (NYSE:M) most-recent quarterly report suggests that there is still plenty of money to be made. The company easily beat estimates, with its traditional gift categories doing particularly well. Why is Macy's succeeding while others,such as Kohl's Corp. (NYSE:KSS) and Wal-Mart Stores (NYSE:WMT) are struggling?
Sales trends improving
Despite an economic climate, that Macy's management described as 'tepid', the company pulled off an excellent earnings beat for its 15th consecutive quarter of improved earnings. Earnings per share were up 31% to $0.47, easily topping the $0.39 consensus estimate. Comp sales were up 3.5%, and rose by 4.6% when taking licensed departments into account. Total sales increased 3.3% to $6.27 billion, beating the $6.19 billion analyst estimate.
According to CEO Karen Hoguet, the firm's strong performance is in no small part due to investments in marketing, as well as promotional efforts. Jewelry, housewares, coats, and sweaters were trending especially well. While the company's spending on promotions and marketing seems to have done the top line a lot of good, it did hurt profit margins.
Both of the company's brands, Macy's and Bloomingdale's, put up a solid performance. After a bad second quarter, the company decided to expand its offering of lower-priced items to better fit a weaker spending environment, a move that clearly paid off. Going forward, analysts are hopeful about the holiday season. As the company didn't raise its guidance, there might be an upside surprise in store for its fourth-quarter report.
So what's Macy's doing differently?
Kohl's(NYSE:KSS), one of Macy's main competitors, delivered some pretty awful numbers in its most-recent report. Net income dropped a disastrous 18%, with EPS of $0.81 missing the expectations. Comps were down 1.6%, versus a consensus estimate of a 0.7% rise. As a result, and perhaps following in Macy's footsteps, Kohl's intends to up its marketing spend. Following the poor showing, Kohl's also tempered its full-year earnings forecast.
Wal-Mart(NYSE:WMT), a rival that generally caters to more budget-minded shoppers, beat EPS expectations by a penny, but offered lackluster guidance going forward. Lower-income shoppers are still feeling the pinch, as the economic recovery in the U.S. is still mainly seen as benefiting the rich. Going forward, analysts are quite cautious about Wal-Mart's outlook, but the company has "aggressive plans" to boost holiday sales.
So, basically, it seems like Macy's has done two things right. The company upped its marketing spend and promotions, which is eating into margins, but definitely boosting its sales. As middle-class and wealthier consumers have more to spend, the firm is managing to cash in. Secondly, it has also made some product lines more appealing by lowering prices, and thus catering to more budget-conscious shoppers.
The bottom line
Macy's delivered a solid beat for its latest quarterly report, with comps up comfortably and income rising yet again. It also seems to be doing a far better job than others in what the industry is calling a tough consumer spending environment. Largely, this is a result of increased marketing efforts and a more adaptive pricing system. With Macy's leaving its guidance intact, there might be an upside earnings surprise for the holiday season.
Daniel James has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.