Macy's Inc. will downsize from seven to four regional operations, eliminating 2,550 positions from buyers to back-office workers and senior officials, as it struggles with a tough sales climate and ongoing challenges related to its acquisition of May Department Stores.
"This part of the job will never be easy. It's very emotional. It's very difficult," Terry Lundgren, chairman, chief executive and president of Macy's Inc., told WWD.
Macy's announcement Wednesday, confirming a WWD report that day, follows other streamlining efforts since the retailer's $17 billion acquisition of May Department Stores in 2005, including earmarking 80 duplicate stores. It has disposed of 70 so far and set an additional nine store closings. The merger doubled the size of Macy's into a $27 billion, 850-unit department store juggernaut.
Following the news, Macy's stock closed down $1.16, or 4.62 percent, to $23.94 on the New York Stock Exchange Wednesday.
Under the consolidation plan, the Macy's North, Midwest and Northwest regional divisions will fold into the Macy's East, South and West divisions, respectively. The Macy's Florida and Bloomingdale's divisions are not affected.
Macy's will take a onetime, pretax charge of $150 million this year as a result of the restructuring, but expects to realize about $60 million in selling, general and administrative savings in 2008, and $100 million annually beginning in 2009. The regional consolidation should be completed in the second quarter of this year. Macy's Atlanta will be renamed Macy's Central.
A small number of the 2,550 employees will be reassigned to remaining divisions, or to a new localization organization, also unveiled Wednesday. The new organization is geared to get a better handle on what stores need in terms of assortments, marketing and service levels to better suit local needs, and add some oomph to what's been an anemic sales performance. Macy's posted total sales of $1.28 billion for the four weeks ended Feb. 2, compared with $1.78 billion in the five weeks ended Feb. 3, 2007. The 28.4 percent decrease was primarily attributed to one fewer week in the January 2008 period versus a year ago. Still, Macy's same-store sales were down 7.1 percent in January, on an apples-to-apples basis.Total sales for fiscal 2007 were $26.32 billion, down 2.4 percent from $26.97 billion in fiscal 2006. Same-store sales slipped 1.3 percent.
In a phone interview from St. Louis, where Macy's Midwest has been based, Lundgren said, "There are a lot of very talented, high-quality people here that I've met with a number of times. I wanted to tell them myself what was happening. While our decision is right for our customers and shareholders, and ultimately for the business, it has harsh consequences for individuals....I told people here, sometimes when a door closes on you such as this, another one opens unexpectedly."
Lundgren said there was no firm commitment to maintain the St. Louis regional operation, despite past reports to the contrary. The only commitment he said he made was to "do our best to maintain as many jobs as possible, and not close the downtown store. In St. Louis, we still have several thousand jobs," in stores, a call center and a distribution center. "St. Louis is still an extremely important market."
Asked if there could be further consolidation within the Macy's empire, Lundgren replied: "I am satisfied this is a structure that can effectively cover the country."
The retailer's new localization strategy is called "My Macy's." It's centered on beefing up local management so the company can stay more on top of community preferences in terms of assortments, sizes, marketing programs and shopping experiences.
"We're adding 250 positions for this new structure," Lundgren said, to work with division central planning and buying executives to help determine space allocations, service levels and visual merchandising. This will roughly double the number of management positions in the field in these markets.
For now, My Macy's is being established in such cities as Chicago, Cincinnati, Cleveland, Columbus, Detroit, Indianapolis, Kansas City, Minneapolis, Pittsburgh, St. Louis and Seattle — in other words, across territories that have been covered by the soon-to-be-defunct North, Midwest and Northwest divisions. My Macy's will be in place in the second quarter, and is expected to have some impact on stores by the fourth quarter or early 2009, Lundgren said.The My Macy's management will be grouped into 20 newly formed districts each handling about 10 stores apiece, compared with an average of 16 to 18 currently overseen by each regional manager. This reduces the "span of control" over stores, as Lundgren said. Each district will have a manager and a small staff of store merchandisers and planners, a total of about 20 people or so. These districts will report to their divisions through new regional offices being established in Chicago, Cincinnati, St. Louis and Seattle, where there could be up to 60 people.
If the localization strategy proves effective, it will be rolled out to the territories covered by the Macy's East, South and West divisions, based in New York, Atlanta and San Francisco, respectively.
"To start, we've got the people that we can draw from to help fill these jobs," Lundgren said, noting that some will come from the divisions being closed. "I'm pretty excited about the new structure. It's about growing sales. It's about trying to be more locally in tune with customer preferences. It's about giving our team a small span of control, so they really get educated about what the product needs are for that local consumer. Maybe it's size, weight, fabric or color. Getting that data is important. We are in the fashion business. You just can't reorder."
New systems and technology are being rolled out to all Macy's divisions to support localization.
Macy's said there will be a slight negative impact on gross margin in the spring as inventories in the consolidated divisions are aligned. The company also said same-store sales guidance for 2008 is wider than usual — down 1 percent to up 1.5 percent. The earnings per share forecast has been revised downward to $1.85 to $2.15, on a diluted basis excluding onetime costs, for fiscal 2008.
Macy's will no longer provide quarterly sales or earnings guidance, which Lundgren said would help the company focus on longer-term goals. The company still expects to reach its goal of increasing earnings before interest, taxes, depreciation and amortization as a percentage of sales to the historic peak of 14 to 15 percent, but won't do it in the 2008-2009 time period originally intended. The company blamed the setback on weak sales and the deteriorating macroeconomic environment."All the expense-cutting stuff is always comforting, but at the end of the day, it's really about having unique and compelling merchandise, and enough of it in stock," said Isaac Lagnado, president of Tactical Retail Solutions. "I would love to hear about some new merchandise initiatives at Macy's. Localization has been around for a very long time. The lion's share of the assortment are still 'top-to-top' deals. Women's, men's and so forth still gets assorted from these large mega-resources. I would love to hear more about creative initiatives to stimulate top-line growth. That really is what is going to save the bacon for the big behemoths like Macy's."
"They are trying to make the merger with May work, but obviously, so far it isn't," said retail analyst Walter Loeb. With the localization, Loeb pointed out that the company still buys centrally, though the distribution will be more sensitive to local needs as to color, style and brands. "The need for closer supervision exists in this company. This is a new layer of closer supervision," Loeb said. The consolidation, he added, is a "huge undertaking" eliminating some bureaucracy. "[Lundgren] needed to do something. They need to do more."
Among the top-level executive changes triggered by the consolidation are:
l Jeffrey Gennette, chairman and ceo of Macy's Northwest, will relocate to San Francisco as chairman and ceo of Macy's West, succeeding Robert L. Mettler, who has agreed to postpone his planned July retirement to become president for special projects, reporting to vice chair Susan D. Kronick. With the consolidation, Macy's West will operate 257 stores in 13 Western states and Guam, with 2007 sales of $7 billion.
Mettler will focus initially on strategies for cosmetics. There have been rumors that cosmetics could be centralized, like Macy's home business, but Lundgren said that was not being planned.
l Robert B. Harrison, Macy's Northwest president and chief operating officer, will remain in Seattle to supervise the transition and later get reassigned.
l Frank J. Guzzetta, chairman and ceo of Macy's North, and Robert M. Soroka, president and chief operating officer, will retire this spring, as they had previously planned. Amy Hanson, Macy's North vice chairman and director of stores, will remain in Minneapolis to supervise the transition and later will be reassigned.l William P. McNamara, Macy's Midwest chairman and ceo, will tackle a new role developing Macy's reinvent strategies. Brian L. Keck, president and chief operating officer of Macy's Midwest, will remain in St. Louis to assist with the transition.
Macy's East continues to be led by Ronald Klein, chairman and ceo, and Mark S. Cosby, president and chief operating officer. With the consolidation, Macy's East will operate 252 stores in 20 Eastern and Midwestern states and Washington, D.C., with 2007 sales of $9 billion. The consolidated Macy's Central division will incorporate 240 stores in 18 states with 2007 sales of approximately $5.3 billion.
All retail division chairmen continue to report to Kronick.
Reacting to the news of Macy's weaker-than-expected sales, Standard & Poor's downgraded the retailer's stock to "sell" from "hold" and reduced its fourth-quarter EPS estimate to $1.57 to $1.62 before a onetime tax credit and merger integration costs. The previous estimate was $1.75.
"Given our concerns over a weakening economy and execution risk with merchandise localization plan, we are cutting our fiscal '08 operating EPS estimate by $0.15 to $2.15, and fiscal '09 by $0.75 to $1.85," S&P said.
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