If Macy’s Inc. had a crystal ball, executives would get right into the minds of consumers to see where they will spend more or spend less.
“The biggest challenge that we’ve had in terms of thinking about managing through the beginning of 2022 is, where is the demand going to come from?” said Macy’s Inc. chief financial officer Adrian V. Mitchell.
“We do believe the demand is out there. We do believe that the consumer is going to be spending. But are they going to be spending on discretionary items that we sell? Or are they going to be spending on an airline ticket to Florida or going out to restaurants more? So that level of unpredictability is something we just have to be very measured around.”
Speaking Thursday at the JP Morgan Chase Annual Retail Roundup, Mitchell, in a 50-minute Q&A format, underscored Macy’s cautious approach to the planning — low, single-digit sales gains are seen — and the highly unpredictable retail climate.
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He also outlined several growth opportunities for the $24.5 billion Macy’s Inc. Among the biggest:
• Developing new categories of business through marketplace formats in the second half of 2022. Marketplace creates “a whole new ecosystem and a whole new capability for us,” Mitchell said.
• Engaging and retaining customers that shopped Macy’s for the first time last year through personalization efforts and getting more “bronze” level shoppers (those loyalty customers at the lowest tier of spending) to use the Macy’s card; 19 million new customers, primarily younger and more diverse, were picked up in the fourth quarter.
• “Infilling” markets with off-mall formats like Bloomie’s, Market by Macy’s and Backstage. “When you have a box that’s 30,000 to 50,000 square feet, you can access a lot more markets than what we traditionally have been able to with a 200,000-square-foot box,” Mitchell said.
• Location-level pricing, so individual stores can maintain their own degree and depth of promotional activity. “We had it structured in five regions; now we have it in individual stores. Each store can have different depths of promotions,” Mitchell said.
• Macy’s media network, where vendors can devote marketing dollars to drive sales on macys.com or bloomingdales.com.
• Stepped up efforts to monetize real estate.
Macy’s has 10 developers “actively” looking at opportunities around the country, to convert certain Macy’s stores into mixed use properties, or taking certain Macy-owned parcels, such as parking lots, and converting them to restaurants, offices, medical complexes or residences. Before, Mitchell said, only five developers were engaged.
On the retail climate, Mitchell said 2022 moves to a more intense promotional environment than what was seen last year; that inflation is higher than expected, and supply chain problems are not solved. “We are still sorting through supply chain challenges,” the CFO said.
He also said 2022 will be, for Macy’s, a year of elevated SG&A largely due to investing in talent for developing the online marketplace formats for the Macy’s and Bloomingdale’s divisions; wage increases with most of supply chain and store workers moving up to a $15 an hour minimum wage, and automating the supply chain. In addition, Macy’s will be offering shareholders a “modest but growing dividend over time.”
On profitability, Mitchell characterized Macy’s as “a double-digit EBITDA business. That’s what we’ve committed to going forward. That’s what we see with all the initiatives that we’re doing. And with that, with disciplined investments, we should have very, very healthy free-cash flow.”
He said Macy’s debt is entirely unsecured and that there are no material debt maturities for another five years, and in years six and seven, they’re only modest. “That creates a bit of a runway for investments and returning capital to shareholders,” he said, adding that Macy’s has a three-year, $3 billion capital budget.
“We believe the consumer is healthy but we also recognize that right now we are operating in really unprecedented times,” Mitchell said. “When you think about the high levels of inflation, the level of uncertainty we see, we believe that it’s going to weigh on consumer confidence for a long period of time.…We are really watching what’s going to drive demand and unfavorable demand in the categories we sell.”
He characterized 2022 as being “a year of events” marked by an “unprecedented” number of weddings scheduled that in combination with consumers traveling more and attending other social events, bode well for several of the merchandise categories sold at Macy’s Inc.
“Dresses, cosmetics, men’s tailored clothing, shoes are really trending healthy relative to what we expected coming into the year, but part of that is being offset by areas of softening demand,” Mitchell observed, citing active and casual apparel, soft home textiles and housewares relative to the acceleration seen in the peak of the pandemic.
“On the uncertainty side, the things we are looking at are record inflation, the lack of stimulus, the increase in interest rates, instability in the stock market and challenges with the war in the Ukraine. When we look at the low- to middle-income customer, we think there is more pressure.” On the other hand, “Higher income customers seem to be resilient and continuing to spend as they progress through 2022.”
Mitchell said domestic tourism is “really healthy. People are traveling, going on spring break, going to see family. We feel really good about the momentum.”
However, with international tourism, which typically represented 3 to 4 percent of Macy’s pre-pandemic sales, “We don’t expect additional momentum in 2022. Again, there’s just so much uncertainty that’s out there.”
Still, in the fourth quarter last year, “Shoppers were coming from the U.K., Mexico, Canada and Brazil. The 30 or so stores that tend to have a higher proportion of international shoppers actually did well in the fourth quarter.”
He said Macy’s is targeting a 38 percent gross margin rate in 2022, compared to the mid-30s in previous years. He said the company is buying more “corporately” based on predictive demand, that it can maintain an elevated gross margin even with higher digital penetration and that the biggest pressure on gross margin is delivery expense, though that’s being offset by efforts to reduce split shipments or packages per order, reduce the distance that packages travel and by “staying very close to carriers.”
He said Macy’s supply chain network is “fundamentally decades old” but automation upgrades will be coming on line in 2023 and 2024. The corporation said last week that it will spend $584 million to build a new fulfillment center in China Grove, N.C., expected to begin operating in 2024.
Some of the impact inflation has on buying decisions by customers can be mitigated by offering more value in products through, for example, greater embellishment and details in the design. “We are working to play with the value equation. We can’t just increase prices,” Mitchell said.
“What we are really leaning into more this year is really this notion of predictive demand by item, by location, by channel. That’s a really important dimension for us.
“We’re also being very thoughtful about how we navigate the promotional intensity. The pricing science for us is actually quite important. So if you think about pre-2021, a lot of what we had in terms of our pricing sophistication was in five regions, where in each region the pricing cadence was fixed. The [promotional] depth was fixed — 25 percent off on the first markdown, 50 percent off on the second. The entire region, irregardless of sell-through rates, irregardless of inventory availability by location, had been just much less sophisticated.”
By the end of this year, however, as Mitchell said, Macy’s will have a very different pricing cadence, where any given store location or local market will have the ability to control its pricing, as opposed to pricing changes on a regional level. “It just gives us a lot more flexibility to kind of manage areas where we may have excess inventory, and manage demand and margins where we have less inventory,” Mitchell said.
“There is no question in our mind that we’re likely going to be moving into a more promotional intense environment,” he added. “There’s still uncertainty. There’s still pressure on the consumer. Even though the consumer is healthy, we do see that inflation is elevated more so than what we expected coming into the year. And we also recognize that the supply chain disruptions are not solved. Even though it’s better than months ago, there are still challenges. There are still delays.
“For us, it’s about pivoting away from broad-based promotions and getting into much more personalized offers. We can maximize margins better. We can speak to the customer in a way that they’re engaged and active and engaging on product that is relevant for them.”
For shareholders, “We’re very much focused on a modest yet growing dividend over time, growing about 5 percent per year. But it’s got to be predictable. And then [there will be] meaningful share repurchases when appropriate. So we feel we have a lot of financial flexibility at this point to really invest in the growth profile of the business. And we’re excited about a lot of the innovations that we have in the pipeline.”