2nd UPDATE: Macy's Posts 3Q Profit As Sales Rise Nearly 7%

Celebrities and service are going to be keynotes for Macy's Inc. (M) during the holiday selling season.

Riding a resurgence of sales this year, the retailer is now turning to its employees and the famous names whose products it carries to continue the strength through the holiday season.

"We have momentum as we enter the fourth quarter," Chief Financial Officer Karen Hoguet told analysts during a conference call after the retailer on Wednesday posted strong third-quarter results.

Hoguet said she didn't expect the holiday season "to be any more promotional than last year" in terms of pricing and that Macy's will be "very thoughtful about pricing decisions" in the face of higher material and labor costs all retailers are starting to deal with.

"We want to maintain a very high level of value for our customers, but at the same time, obviously, we also want to maximize sales and margin," Hoguet said. "So I think it's just too early to say."

Macy's will be quite promotional when it comes to trying to build sales during Christmastime. The retailer is upping the profile of the celebrities whose merchandise it already carries, such as Jessica Simpson, Martha Stewart and Rachel Roy, by offering "designer gifts" under their names. Seasonal staff is being trained through Macy's "Magic Steps" program to engage customers, provide advice and encourage them to buy. Some 400 stores will have new gift shops that carry limited edition gifts for under $50. The products are being promoted in a variety of ways, including online, Hoguet said.

"Our organization is ready and prepared to execute the fourth quarter to a whole new level," she said.

The comments followed Macy's reporting strong third-quarter results, reflecting the continuation of a turnaround strategy that emphasizes local tastes and is allowing the retailer to outpace competition.

Macy's posted a profit for the period ended Oct. 30, coming back from a loss the same time a year ago, as sales rose.

"Throughout 2010, we have gained confidence and momentum as customers have responded favorably to our execution of key strategies developed and activated over the past few years," Chief Executive Terry Lundgren said.

But the results may have come at some cost. Gross margin, which gauges how much profit is derived from sales, fell in the third quarter, suggesting that already highly promotional Macy's may be becoming even more so. The average price for merchandise in the third quarter was "flattish...down a little bit," Hoguet said. Macy's also expects its gross margin in the fourth quarter to be below the prior year's, she said.

Macy's game plan of late has been to more closely tailor merchandise to local tastes and needs, with efforts ranging from having more warm weather gear in the South for longer in the season to stocking Kentucky Derby merchandise in the Louisville, Ky., area as the big race draws near. The company has continued to benefit from prior consolidation of its divisions and introduction of new brands, including the recent launch of the Material Girl Line by Madonna and her daughter.

The approach appears to be paying off, with Macy's outdistancing major competitors Kohl's Corp. (KSS) and J.C. Penney Co. (JCP) in monthly comparable-store sales. Kohl's and J.C. Penney are scheduled to report their third-quarter results on Thursday and Friday, respectively.

Macy's is also enjoying the resurgence of upper-end spending, with its Bloomingdale's chain seeing strength in the latest period. The retailer also saw a surge in online sales.

The third-quarter showing, taken in its entirety, makes Macy's "well positioned to take market share this holiday season," said Citigroup analyst Deborah Weinswig.

Macy's in the third quarter reported a profit of $10 million, or 2 cents a share, compared with a prior-year loss of $35 million, or 8 cents a share. Excluding debt-repurchase and other impacts, earnings were 8 cents compared with a loss of 3 cents.

Analysts polled by Thomson Reuters most recently forecast a 5-cent profit.

The retailer for the full-year expects earnings of $1.94 to $1.99 a share, based on second-half guidance it raised last week and what Macy's reported in the first two quarters.

Gross margin edged down to 40% from 40.5%, while overhead costs were flat.

Macy's last week reported total sales increased 6.6% to $5.62 billion as same-store sales grew 3.9%. A year earlier, total sales fell 3.9% and same-store sales fell 3.6%.

Sales grew 24% at its online business, which includes macys.com and bloomingdales.com.

Shares were recently 0.8% lower at $25.02.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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