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.