Macy’s Inc. is cautious about 2015 — and Wall Street doesn’t like it.
The retailer issued a conservative sales and profit outlook for the year, which it considers a “transitional” one for testing off-price, international and new in-store formats and setting the stage for higher top-line gains in 2016.
The $28.1 billion company, operator of Macy’s and Bloomingdale’s, expects total sales to grow just 1 percent and comparable sales to gain 2 percent in 2015. Earnings of $4.70 to $4.80 a share are seen, which is about 3 cents shy of what analysts have been expecting.
Wall Street reacted swiftly to Macy’s lowered outlook, punishing the company’s shares on Tuesday even as the firm’s executives characterized the performance for the fourth quarter and 2014 as strong. Shares fell 3.2 percent to close at $62.10 on the New York Stock Exchange, indicating analysts weren’t necessarily pleased by the retailer’s forecast.
Terry J. Lundgren, Macy’s chairman and chief executive officer, explained the conservative outlook by saying, “The consumer is definitely putting more money in their pockets than a year ago [because of lower gas prices]. The question is whether they spend money in categories we are in.”
If they go for apparel and accessories, “We will definitely get our share,” Lundgren added. “If they spend it in entertainment, technology, downloads and health care, that won’t help. They’ve got more money in their pockets. It’s a matter of where they are prioritizing it. Hopefully, the consumer will spend more in our categories than they demonstrated last year.”
Declining tourist spending due to the strong dollar isn’t helping Macy’s business. “Tourism definitely matters for us in our big cities — New York, San Francisco, Chicago, Miami,” Lundgren said. “The tourists came in the fourth quarter, but I believe they came because they already booked their reservations. They did not spend to the degree they had in the prior years.” One exception was with Chinese tourists where the spend seemed to grow, Lundgren noted.
Business this quarter is being impacted by the frigid weather and the West Coast ports slowdown, which was resolved late Friday and has impacted about 12 percent of first-quarter Macy’s receipts.
On the other hand, the strong dollar “should help us in terms of pricing,” Lundgren said. “We’ll start to see that mostly in the second half, with even better values on the floor. That’s the positive side. The negative side is the foreign consumer has fewer dollars.”
Macy’s net income in the fourth quarter ended Jan. 31 — due to costs largely related to store closings and organizational restructurings — dropped to $793 million from $811 million in the year-ago period. The year included $33 million of asset impairment charges primarily related to store closings revealed in January, $46 million in severance and human-resource related costs and $8 million in other costs.
Net sales in the fourth quarter were up 1.8 percent to $9.36 billion from $9.2 billion in the year-ago period, while comparable sales rose 2.5 percent. The best-performing categories were coats, active, dresses, handbags, younger Millennial apparel, men’s and women’s shoes, cosmetics, furniture and mattresses. Housewares and tabletop were weak. The gross margin, at 40.3 percent, was down 30 basis points from last year. Merchandise margin was down by about the same amount.
“I just think we had a great fourth quarter and ended up having a great year,” Lundgren said. “You’ve got to look at it by earnings per share. At $4.40 [after excluding charges of $87 million], it was a very, very good year for the company.” That was about 10 percent above the $4 a share earned in 2013, excluding charges.
Going forward, Macy’s hopes to at least maintain adjusted earnings before interest, taxes, depreciation and amortization of 14 percent of sales, a long-term target that the company hit last year. Adjusted EBITDA reached $3.92 billion in 2014, while net income rose to $1.53 billion from $1.49 billion in 2013. Sales last year rose 0.6 percent to $28.1 billion from $27.9 billion, and comparable sales rose 1.4 percent.
Lundgren called the 14 percent adjusted EBITDA “a milestone,” positioning Macy’s among “best-in-class retailers.” He credited the achievement to the My Macy’s merchandising localization program, improved selling techniques among associates known as “magic selling,” and omnichannel initiatives.
“Now we are at a profitability level that is among the highest in the industry, and so we want very much to get focused on [sales] growth and that’s where we are trying to turn a lot of our attention,” Lundgren said.
“We are going to invest in growth, both organic, meaning Macy’s and Bloomingdale’s, our online businesses and omni, and also new business categories — Macy’s off-price, international and Bluemercury — and we’ll push hard to see what opportunities we have. Over time, we expect returns will be very strong in those areas.” That makes 2015 “a little bit of a transition year as we go after those new businesses. We are still predicting growth in sales and earnings in 2015.”
Capital expenditures for 2015 will grow $100 million to $1.2 billion. Macy’s could open its first outlet this year as executives have begun to explore the possibility of launching an off-price format for the retail brand, but they provided no information on timing.
Lundgren said with top management recently reorganized to lead “innovation and new growth initiatives — including off-price, international and new store formats — we expect some of these new activities to enter start-up phases later in 2015, and we remain committed to succeeding in a test-and-learn environment where the best and most promising ideas can be ramped up quickly.”
Asked what’s the next big omnichannel initiative, Lundgren said, “We’ve literally only been in the business of buy-online-pickup-in-store for one year, delivering merchandise from stores to homes for only a year, and same-day delivery was just announced in the fourth quarter. We just feel like we have so much more opportunity,” to further develop those capabilities.
The ceo said Macy’s will expand same-day deliveries, happening in San Francisco; Los Angeles and San Jose, Calif.; Houston; Chicago; northern New Jersey; Washington, D.C., and Seattle, to additional cities around the country. Macy’s contracts with Deliv for same-day delivery. “We’d like to do it broadly. It depends on where [Deliv] has critical mass to take on the market,” the ceo said.
Lundgren said the Bluemercury acquisition should be completed in the current quarter. The initial focus will be on “accelerating the growth of Bluemercury’s base of self-standing specialty stores in urban and suburban markets, as well as on accelerated omnichannel growth and offering Bluemercury products in Macy’s stores,” Lundgren added. “This represents a new channel and access to new customers for our company.”
As reported this month, Jeff Gennette, president, will concentrate more on developing broader growth strategies across channels and merchandise planning, while maintaining oversight responsibility for merchandising and marketing of stores and digital, and private brand growth.
Peter Sachse, Macy’s chief stores officer since 2012, has become chief of innovation and business development. “This is the first time we had a senior person assigned full-time to growth, piloting a [Macy’s] off-price concept and developing an approach to innovation and studying international opportunities for both stores and digital,” Karen Hoguet, Macy’s chief financial officer, said during a conference call.
Bloomingdale’s began opening outlets in 2010. “We found that it served as an entry point for customers. It actually brought customers to the core business” instead of taking business away, Hoguet said.
Before the Sachse appointment, “It was always me and one other person running around the world looking for opportunities,” Lundgren said during the interview.
“I have been traveling to China myself for more than 10 years, visiting certain factories. We don’t own any factories, but visiting more as a student to understand the culture, meet the political leaders, business leaders and learn about business opportunities there.”
Asked if there could be an announcement this year regarding launching Macy’s in China, Lundgren said, “You never know. You never know.”