Macy’s Inc. took a nosedive in 2015 but said it expects better earnings this year and that real estate deals are in the works.
While sales perked up in January due to a blast of cold weather, business is expected to remain challenging through most of 2016. The $27 billion department store chain expects to see negative comparable-store sales through the first three quarters of the year before turning positive in the fourth quarter.
For 2016, Macy’s expects comparable sales to decline by about 1 percent, while total sales are expected to be down by about 2 percent, reflecting the 40 stores closed in 2015. Comps are seen turning positive in the fourth quarter after three negative quarters.
Earnings of $3.80 to $3.90 per diluted share are expected in 2016, compared to the $3.77 earned in 2015.
The outlook boosted the retailer’s shares, which rose 3 percent, or $1.26, on Tuesday to $42.50.
“We do hope we are turning a corner as we start the new year,” said chief financial officer Karen Hoguet, in a conference call. “We view this year as one of resetting and rebuilding.”
In an interview following the release of the retailer’s fourth-quarter and year-end financial results, chairman and chief executive officer Terry J. Lundgren outlined several strategies intended to bolster the business, including a new format for clearances in women’s and men’s wear that was tested last year and rolled out to all stores last month. He said the pricing has been simplified, coupons are no longer used in the clearances so customers don’t have to do the math to figure out the final price out the door, and the clearance merchandise is more conveniently located in one area for men’s and one for women’s, rather than in several areas, making shopping easier.
Lundgren cited intensified investments in mobile and refinements to the My Macy’s, omnichannel and Magic Selling strategies, collectively known as “MOM.” Lundgren said that My Macy’s continues to focus on localizing assortments but has begun enhancing “personalization” efforts. He also said there is an intensified investment in mobile involving improving the Macy’s app. Sales on mobile devices more than doubled at Macy’s in 2015, fueled by increases in traffic and conversion. In addition, sales associates are being given additional tools to better help shoppers and make the transaction process more efficient; sales managers are being given more access to tablets to stay connected with sales associates and customers, and Macy’s is increasing the investment in the number of people in the stores organization, particularly in the 150 top doors. However, as Macy’s recently closed 40 stores, it is keeping the headcount down.
Macy’s is trying to drive growth at the top 150 locations, where it says it is improving products and presentations, customer service and special events. “More and more you are going to see us pushing harder on experiences inside our stores,” Lundgren said.
The retailer also has a new approach to fine jewelry and watches involving what executives said are higher-quality offerings, strengthened selling skills, better compensation for associates and providing greater direct supervision. “We are rolling this approach out across the country,” to 300 doors by the fall and to the rest of the chain a year later, Hoguet said.
Macy’s will also be rolling out Backstage off-price stores inside 15 existing full-line stores. Only one Backstage freestanding unit will open this year, on top of the six opened last year.
On the real estate front, at least one deal is expected to be unveiled sometime this year, possibly a joint venture. Macy’s has been under pressure from activist shareholder Starboard Value LP to monetize its real estate assets, which Starboard said are worth $21 billion.
“We are working very hard on this subject right now,” Lundgren told WWD. “We are getting great advice. There are lots of interested parties. There is much more to do. An actual transaction takes a long time. Remember, the Brooklyn [in New York] transaction took more than a year. We are working fast and furious.”
In that transaction, Macy’s received $270 million in a deal with Tishman Speyer under which the retailer will continue to own and run the first four floors as well as the lower level of its existing nine-story Brooklyn flagship on Fulton Street, which will be reconfigured and remodeled in a $100 million project over the next three years. Tishman Speyer will redevelop the site into about 10 floors of office space. The real estate firm also bought Macy’s Hoyt Street parking facility, which will be reconfigured for a mixed-use development.
Lundgren said he has been interviewing real estate executives for one full-time position at Macy’s to deepen the exploration into how to maximize the company’s extensive real estate. “I’ve met some outstanding candidates,” he said. “It’s not going to be someone from the department-store industry. It will be a true real estate professional. We have never had someone with this kind of experience before.”
It’s unclear whether the real estate efforts are enough to relieve pressure for change being exerted by the activist shareholders or whether they will battle Macy’s for greater change.
“We have communicated with all of our shareholders as we always do,” Lundgren said. “Most of the people we talked to are very pleased with the way we are handling this. We are enthusiastic about the unleashing potential value of our real estate.”
Added Hoguet: “By yearend hopefully, we will have executed some real estate transactions, which are not included in guidance. We are very competitive and no one is thrilled with how 2015 turned out.”
Macy’s last year struggled with weak sales of winter apparel due to unusually warm weather for much of the fourth quarter. The situation was compounded by ongoing declines in tourist spending, and consumers spending more on homes, autos, restaurants, travel and other experiences, and less on fashion.
On Tuesday, the retailer reported that net income fell 31.5 percent to $543 million in the fourth quarter ended Jan. 30, from $793 million in the year-ago period. Sales in the quarter declined 5.3 percent to $8.87 billion, from $9.36 billion.
The pickup in January led to better-than-expected sales and profits for the fourth quarter. “Clearly, January was driven by cold weather. It was all about coats, sweaters, gloves, hats and boots, all the stuff that did not sell in November and December,” Lundgren told WWD.
For the year, Macy’s net declined 30 percent to $1.07 billion, from $1.53 billion the year before. Revenues dropped 3.7 percent to $27.08 billion, from $28.1 billion the year before.
On a comparable basis, sales were down 4.3 percent in the fourth quarter and down 2.5 percent for the year.
Macy’s performance was below its competitors, such as Hudson’s Bay Co., partly because its locations are more concentrated in the Northeast where the weather was unusually warm, and many Macy’s and Bloomingdale’s locations are very reliant on tourists. While the number of tourists coming to the U.S. has not declined, spending by tourists at fashion stores has. Saks Fifth Avenue, Nordstrom and Neiman Marcus have also been impacted by changing tourism patterns.
Regarding Macy’s business overall, Lundgren said, “We still have things we are trying to work through,” though he said several categories are performing well, including active and beauty. “The acquisition of Bluemercury has been a positive,” he added. Since the deal closed, Macy’s opened 15 Bluemercury stores, bringing the chain to 77 units. Macy’s also opened the first four in-store Bluemercury shops.
For the fourth quarter, the best-performing categories were cosmetics, fragrances, furniture, mattresses and activewear, Hoguet said. She added that Bloomingdale’s had a more challenging quarter than Macy’s.
The corporation ended the year with inventories in good shape, up 1.6 percent.