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Macy’s Sets Strategy to Keep Momentum

With year-end results surpassing the competition's, the department store chain has a tough act to follow — its own.

NEW YORK — Macy’s Inc., with year-end results surpassing the competition’s, has a tough act to follow — its own.

Yet the $28 billion department store chain has a host of evolving strategies to keep the momentum going, according to Terry J. Lundgren, chairman, president and chief executive officer.

In an interview, Lundgren said the agenda for the near future revolves around accelerating omnichannel capabilities, testing shared inventories across channels, aggressively rolling out additional leased shops, restarting outlet openings, and spreading selling floor best practices to online and phone communications with customers.

Also in the works:

• Expanding the shop online-pick up instore service.

• An urban strategy that could launch in Macy’s downtown Brooklyn store, where renovation plans are being developed.

• Same-day delivery tests.

Along with these and other initiatives to sustain momentum, Lundgren cited a pickup in business since a few days just before Valentine’s Day, but he acknowledged this winter’s crushing impact, which kept many stores closed at times in January and early February and stifled consumers’ will to shop even when the weather let up.

“We got pounded,” Lundgren told WWD. “The first couple of weeks of February were a continuation of the bad weather in January.”

The bombardment of brutal weather “psychologically drained” the consumer away from shopping, Lundgren surmised. “And it wasn’t just apparel” that got hit, he added. “It was many categories outside department and specialty stores — food, automobile retailers. I heard from many that the consumer just wasn’t out there buying.”

Lundgren said the online business did not go up dramatically amid the bad weather. “Sometimes you do see that happening, but that did not happen in January. There was really no urge to buy.…But then all of a sudden Valentine’s Day comes around and there’s that pent-up demand and need for a great gift and then the weather starts to normalize in certain parts of the country and you have consumers saying, ‘Perhaps there is going to be a spring.’”

A “psychological lift” appeared to have occurred right around Valentine’s, Lundgren said, giving hope for this quarter and beyond. The later Easter, on April 20, is expected to support spring business and is fueling some optimism across the industry.

In the fourth quarter, with January sales beyond disappointing, Macy’s revenues totaled $9.2 billion, down 1.6 percent from $9.35 billion in the year-ago quarter. Nevertheless, net earnings rose 11 percent to $811 million from $730 million.

Handbags; cold weather apparel and accessories; Impulse for older Millennials, including the Bar III and Maison Jules collections; men’s dress clothes and shoes; luggage; furniture, and mattresses were the strongest categories. There was also strengthening in women’s apparel. On the other hand, watches, fragrances, housewares and tabletop were weak, as was juniors, though that category saw some improvement with dressier products.

For the year, sales rose slightly to $27.9 billion from $27.7 billion and earnings rose to $1.49 billion from $1.34 billion.

The company reiterated its annual sales and earning guidance, saying comparable sales growth in fiscal 2014 is expected in the range of 2.5 percent to 3 percent and earnings of $4.40 to $4.50 a share are seen. Capital expenditures for 2014 are expected to be about $1.05 billion, which includes amounts delayed from 2013. Macy’s has a goal of 14 percent earnings before interest, taxes, depreciation and amortization as a percentage of sales, and reached 13.6 percent last year.

Lundgren sounded most enthusiastic about leased shops. “It’s a very big idea for us,” Lundgren said. “They elevated our sales by 90 basis points.”

Asked where’s the white space for introducing new leased concepts to the selling floors, he was quick to reply electronics, which Macy’s sells a very limited amount of through vending machines. “We never did electronics well. We never got the newest products. Perhaps we could be doing something with somebody in that zone. It could create an exciting addition,” he said.

Lundgren also said that children’s furniture could be another licensed business Macy’s could get into and noted that Bloomingdale’s has looked at children’s strollers.

“Lids was a really great idea. That was a home run,” he added. Macy’s opened 26 Lids shops last year and plans to bring the count up to 175 this year. Lids sells team sports merchandise. The Finish Line, which specializes in footwear, is currently in 181 Macy’s stores and will be in 450 locations by yearend, while Sunglass Hut is already in 700 stores and fully rolled out.

Macy’s also has a small number of Lush cosmetics shops, as well as optical and watch repair shops that are leased, and, at the Herald Square flagship, Gucci, Burberry, Longchamp and Louis Vuitton operate leased shops. Bloomingdale’s has several luxury accessories and designer ready-to-wear shops, mainly from Europe, that are leased.

Including the licensed departments, Macy’s comparable sales rose 2.3 percent in the fourth quarter ended Feb. 1. Excluding licensed departments, comp sales rose 1.4 percent.

“I feel great about the year and particularly good about 11 months of the year,” Lundgren said. “January was obviously very difficult. It really was a setback. A third of my stores were closed at one point or another. However, the team did a great job of delivering earnings beyond expectations.”

Addressing the omni initiatives, Lundgren said the buy online and pickup in store program started with 10 stores in the Washington, D.C., area last holiday and will be in 675 stores by the end of the spring season. Getting customers to pick up their online purchases in the stores leads to impulse shopping, and customers are told online where in the store their packages can be found. The same merchandise handlers that pick merchandise for shipping from the stores, pick merchandise for in-store pickups. All Macy’s stores have shipping capabilities off online orders.

The “magic” selling program, Lundgren said, is being applied to online and phone conversations, including further training telephone associates with product knowledge and on answering credit questions and empowering them to make more decisions.

With big ticket deliveries, Macy’s has rolled out its “five-star” service for on-time and accurate deliveries. “We need to make magic in all of our customer interactions, not just the selling floor,” Lundgren said.

Macy’s tested having a single social dress inventory last fall for macys.com and Macy’s stores, involving using the online buyers and store buyers to shop the market and work together to create on one shared inventory. Lundgren said there was a “fantastic” performance by social dresses and that the test has been expanded to all dresses for the fall season. The strategy leads to better editing, buyers from both channels being better informed about products, trends and bestsellers, and inventory that’s better utilized and subject to fewer markdowns.

With same-day deliveries, Macy’s is in test mode, working with eBay, UPS and Federal Express, as well as some local delivery companies in different parts of the country. “The important thing is the industry is trying very quickly to move toward faster deliveries,” Lundgren said.

With outlets, Lundgren said he challenged the Bloomingdale’s organization to get that business right. Thirteen were opened, and then expansion was put on hold in lieu of some location and layout changes. “We put it on pause for the last year. Now we are ready to support that growth strategy,” Lundgren said.

There are no Macy’s outlets. Asked if there could be any, Lundgren said. “I never say never but at this point we feel the Macy’s price point already offers great value. A Macy’s outlet would be hard pressed to see the right price point.”