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‘Core’ Customer Drives Macy’s in Q1

The company reported growth in both net income and net sales for the period.

The “core” customer made the quarter for Macy’s Inc.

While Bloomingdale’s shoppers and budget-conscious Macy’s customers held back their spending, Macy’s Inc. said Wednesday that business overall was strong, and that net income rose 19.9 percent in the first quarter amid a 3.8 percent rise in comp-store sales.

Net income reached $217 million, or 55 cents a diluted share, from $181 million, or 43 cents. Net sales increased 4 percent to $6.39 billion from $6.14 billion.

“I was in six different cities in the last three weeks with my executive team visiting stores and it’s all just coming together, even when you’ve got headwinds,” Terry J. Lundgren, Macy’s Inc. chairman, president and chief executive officer, told WWD. “I just think our strategies are driving our business,” Lundgren said, referring to the My Macy’s field organization for localizing assortments; omnichannel initiatives including Web site upgrades and fulfilling orders by shipping products from stores, and the Magic Selling program geared to improve the skills of sales associates. Macy’s has racked up 13 straight quarters of comp-store gains of at least 3 percent.

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Lundgren did acknowledge that the Bloomingdale’s division was on “the softer side” in the first quarter even as high-end businesses have mostly been performing well. “Today you could argue those deep in the equity market have to be feeling pretty good. There have been lots of highs every day,” Lundgren noted. “Having said that, a lot of people have pulled out of the market and are sitting on the sidelines, and people are feeling the effect of higher income taxes. Statistics say a significant amount of people have pulled out of the market believing it’s too risky and are putting money elsewhere,” such as in real estate and remodelings, Lundgren said.

On top of that, “The weather has just not cooperated with the type of apparel we typically sell this time of year,” Lundgren added.

Macy’s customers have a household income of $75,000 on average, though the range is wide. According to Lundgren, those making around $35,000 or $40,000 are “really feeling the challenges” associated with higher payroll taxes and rising gas and food prices. “That impacts Macy’s on occasional big sales days,” Lundgren said.

During a conference call, some retail analysts expressed concern about high-end Bloomingdale’s customers and budget-minded Macy’s shoppers, but Karen Hoguet, chief financial officer of the $27.7 billion, 840-unit Macy’s Inc., replied, “The truth is you should really be focusing on the overall strength of the Macy’s business. The core of the business remained quite strong….Every day we see warm weather, the business gets stronger,” particularly in such areas as apparel and sandals.

Hoguet said the strongest merchandise areas were handbags, watches, active apparel, men’s, home textiles, luggage, furniture, mattresses and private brands generally. Cosmetics and shoes had a good quarter but were not as strong.

In women’s apparel, dresses, denim, Impulse contemporary sportswear, athletic apparel and private brands did well. Special sizes and structured jackets were weak, and athletic footwear was hampered by the transition to a licensed format with The Finish Line Inc., which this season began opening shops-in-shop inside many Macy’s locations. Finish Line becomes the exclusive partner for men’s, women’s and kids athletic footwear, and Macy’s will be the exclusive host for Finish Line-branded in-store shops.

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Hoguet also cited Macy’s strong cash flow, with net cash from operations at $298 million last quarter, versus $265 million in the first quarter of 2012. The extra cash enabled Macy’s to increase the quarterly common stock dividend by 25 percent to 25 cents, and approve a $1.5 billion increase in its share buyback program, bringing the remaining authorization outstanding to $2.6 billion. The company stuck to its forecast for 2013, projecting a 3.5 percent comp gain and $3.90 to $3.95 profit per share.

On the omnichannel front, Hoguet said, by the end of the year, 500 Macy stores will be fulfilling orders. Stores also have the capability to product-search other stores to better meet customer demands and raise revenue.

While there were some pockets of weakness, Hoguet suggested there are no worries over inventories. “On any given day there are pockets of [excess] inventory, but there are no big pockets or major liabilities as we go into the second quarter.”

She also addressed some emerging strategies, including licensing arrangements and Bloomingdale’s outlets. Macy’s could sign additional license deals “where we don’t think we can get the best product for our customers,” Hoguet said. “But I don’t see it becoming a huge part of the business.” With the Bloomingdale’s outlets, “We are trying to refine the formula before we roll it out more aggressively.” There are currently 12 outlets.

She talked up radio frequency identification as key to accurate replenishing and locating products in stores, particularly with shoes, which can be “a cumbersome task” otherwise. By late summer, all Macy’s stores will have RFID capability.

Hoguet briefly addressed the competition. Performances for the past year have been weaker at J.C. Penney Co. Inc. and Kohl’s Corp., but Hoguet downplayed the impact. “People tend to think we compete more directly than we do. It varies greatly by family of business.”