“When you look at the businesses where we are winning, there is a fashion underpinning in all of them,” chairman and chief executive officer Jeff Gennette, told WWD on Wednesday.
While ready-to-wear has long been a soft spot for Macy’s, “With dresses, we have the number-one market share online and in stores, buoyed by great fashion content and that’s across social and career, all price bands, and in kids, juniors and misses,” Gennette said in an interview, just after Macy’s reported second-quarter profit gains and momentum heading into the back half of 2018.
“Look at fine jewelry — that’s about fashion, too,” Gennette added, singling out Macy’s “star signature” engagement rings and fine jewelry designs created exclusively in conjunction with the De Beers Group.
“From young men’s to tailored clothing, we are amazed on how many selections are based on fashion swatches, and there’s a lot in sport coats, too.”
With Macy’s collections businesses, Gennette cited customers’ renewed interest in logos. “Calvin Klein is hot as is our own INC brand.”
“We are bringing in more fashion with more frequency,” Gennette said. “Fashion is improving as a percent of the overall business.”
Macy’s doesn’t break out the proportion of fashion to basics and key items within its overall apparel business, but Gennette did disclose that men’s wear and kids are climbing as a percentage of the total apparel business, and that within women’s apparel, activewear “across the board,” as well as dresses and some pieces of the sportswear business are performing well. However, generally, “ready-to-wear is not. We still have opportunities in ready-to-wear.”
Gennette said the corporation did well across all divisions — Macy’s, Bloomingdale’s and Bluemercury, with net income for the second quarter rising to $166 million, compared with $111 million in the year-ago quarter. Excluding impairment and other costs, settlement charges and losses from early retirement of debt, net income for the second quarter of 2018 totaled $219 million, versus $141 million a year ago.
Earnings per diluted share came to $0.53, or $0.70 excluding impairment and other charges, versus $0.36 per share in the second quarter of 2017, or $0.46.
Comparable sales in the latest quarter, which ended Aug. 4, were up 0.5 percent. That figure includes owned and licensed sales. Net sales in the second quarter totaled $5.57 billion, a decrease of 1.1 percent, compared with net sales of $5.64 billion in the second quarter of 2017. Men’s, kids, fine jewelry, fragrance, women’s shoes, dresses, activewear, big-ticket furniture and certain other home categories have been strongest this year.
With the economy strong and Macy’s managing its business better, the company sees momentum heading further into the second half, and updated its guidance for fiscal 2018. Macy’s now expects adjusted earnings per diluted share of $3.95 to $4.15, excluding anticipated settlement charges related to benefit plans, impairment and other costs. The previous guidance was set at $3.75 to $3.95.
Comparable sales are seen rising between 2 and 2.5 percent for the second half of 2018, which translates to an annual increase of between 2.1 and 2.5 percent.
Despite the generally healthy numbers and raised guidance, Macy’s shares on Wednesday nosedived almost 16 percent amid a broader market selloff. Investors seemed most concerned about margins, mall traffic and the department store sector. Macy’s gross margin increased 80 basis points but that was below expectations. While merchandise margins are up, the gross is pulled down by increased delivery costs as Macy’s Internet and mobile businesses grow.
Asked about the stock drop, Gennette replied, “We feel good about our performance. We raised guidance for the second time this year, basically communicated we were getting traction on our five strategic initiatives,” which include the “Growth50″ strategy for certain stores, the Backstage offprice rollout, the buildup of the vendor direct business, rolling out store pickup services, and the loyalty program which was overhauled last year.”
With vendor direct, Macy’s is focused on extending the offerings from key brands already sold at Macy’s and adding home products not previously offered. Macy’s is doubling the amount of stockkeeping units in the vendor direct program from the count in the back half of 2017.
The “Growth50” strategy entails stores across the country, and not necessarily the best stores. They could be high- or low-volume stores, but for the most part are where developers are investing in mall upgrades. “We are using these stores to test a number of things,” Gennette said, adding that investments include beefing up staffing, improved lighting, carpeting and restrooms, adding big-ticket items, mobile checkouts, expanding size ranges, Backstage, and “At Your Service” counters.
Sixty-five Backstage departments were opened inside Macy’s stores in the first half; another 60 will be up and running by the end of the third quarter. That’s on top of the 40-plus Backstage departments that were already operating. “It’s a competitive advantage having an offprice door in a regular-price mall,” Gennette said, adding that the rollout is bringing the offprice format to West Coast locations and to some “premium” doors for the first time.
Gennette said digital sales are up double digits and that the Macy’s mobile app is getting “great traction.”
Last May, Macy’s bought Story, the 2,000-square-foot store on Manhattan’s West Side that changes its merchandise theme every four to eight weeks. Gennette told WWD that a strategy to build up Story is in the works but gave no details. Rachel Shechtman, founder of Story, was brought into Macy’s management as chief brand experience officer. “She’s having a big impact,” Gennette said.
During a conference call earlier in the day, Gennette said he’s encouraged by momentum heading further into the back half of the year. He said July was the strongest month last quarter, which ended Aug. 4. He also said that the “heightened focus on fashion” is helping raise the average unit retail price, which rose nearly 5 percent in the first half. Greater regular price selling also helps.
He said Macy’s “strong operational performance was amplified by the strong consumer spending environment.” He also said with Macy’s performance in 2018, “compared to general market, we see a big narrowing. That narrowing of the gap is really related to our strategies and related to how we are going to take care of our customers. We are putting a lot of investment in mobile and will pass $1 billion in mobile sales in 2018. Our mobile app is a real gateway for us,” to attract younger customers.
Gennette also cited a “firming up of brick-and-mortar trends,” adding, “Across the fleet we saw improvement. We are very excited about that and expect that to carry us into the back half of 2018.”
While there is some belief that Macy’s still operates too many department stores — 690 — Gennette said, “We are happy right now with our portfolio. Every store has a role to play and we are not just investing in Growth50 or Backstage. We are looking at opportunities in each of our buildings.”