By Andria Cheng
NEW YORK (Dow Jones) -- Department-store operator Macy's Inc.,
with its stock losing more than a third of its value this year, was
upgraded by both Goldman Sachs and Bank of America/Merrill Lynch,
following the company's moves to control costs, cut capital
spending and expand its My Macy's localization initiative to stoke
demand.
Analyst Adrianne Shapira at Goldman upgraded Macy's to buy from
neutral, saying the company's capital spending and dividend cuts,
among other moves, helped reduce concerns about its liquidity. She
also said Macy's is a share gainer in the consolidating
department-store sector, and its efforts to centralize operations
can deliver cost savings. Shapira raised her price target to $8.25
to $8.
Merrill Lynch analyst Lorraine Hutchinson raised the stock to
neutral from underperform. She said analysts' consensus view and
management's expectations have become more "realistic." Hutchinson
has an $8 price target on the stock.
Since the beginning of the year, analysts on average have
lowered their profit forecast on Macy's this year by more than half
to 53 cents a share from $1.35 a share at the end of last year,
according to FactSet.
Still, like other retailers, the upgrades don't signal an
immediate return to positive sales and profits, the analysts
said.
"Macy's is taking the right actions to control inventory and
costs, but the weak consumer will cause continued pressure on
earnings," according to Hutchinson.
Macy's (M) shares rose 5.5% to $6.94 in midday trading Friday,
off from an earlier 11% gain. The stock has lost about 35% of its
value this year and about 72% in the past 12 months.
Like its other department-store rivals, Nordstrom Inc. (JWN) and
Saks Inc. (SKS), Macy's has been hurt by consumers cutting back on
discretionary spending amid rising job losses and the recession,
analysts have said. Chief Executive Terry Lundgren has lowered the
company's dividend and capital spending by more than half and is
centralizing operations to help preserve cash and cut costs.
He's also rolling out the My Macy's initiative nationally, which
tailors merchandise assortment to each individual market, after the
company called an initial pilot program successful. Shapira said
she expects Macy's sales may reach a bottom in March after the
Easter holiday; the government's stimulus program may provide a
potential lift.
"My Macy's initiative is risky, but right," Hutchinson
commented. "It is a huge undertaking to change a corporate
structure so dramatically, but the current environment seems to be
a good time to take big risks like this one, as earnings
expectations are low. A more localized purchasing organization
should allow Macy's to be more relevant to customers in different
regions when exiting the downturn."
Analysts also credited the company's move to focus on cash flow
as it trimmed capital spending and cut other projects. Hutchinson
said she expects Macy's to generate free cash flow of $750 million
this year -- which combined with its opening cash balance of $1.3
billion and a $2 billion revolving credit line, could offer
sufficient liquidity to fund the company's operations, pay down
maturing debt and pay dividends.
Concerns about the company's liquidity given the collapsing
markets that sapped companies' ability to tap credit have at
different times been a big overhang on the stock, according to
analysts.
"Management has taken the question of survival off the table,"
particularly as it has an undrawn $2 billion credit line that
expires in 2012 and has recently amended its credit line, Shapira
added.