CINCINNATI — Despite the sharp slump in business and pressures to increase shareholder value, Terry J. Lundgren breezed through another annual meeting, during which the Macy’s Inc. chairman and chief executive officer several times emphasized “agility” and “experimentation” as keys to a better future.
At the meeting held Friday at Macy’s headquarters here, Lundgren predicted a rebound for the company in the not-too-distant future, stating, “We view the setbacks of 2015 and early 2016 as a setup for a comeback that we expect to begin in the second half of 2016 and move forward from that point.”
Later, in a meeting with media, Lundgren explained the comeback would be based partly on new strategies gaining scale, such as the new Last Act clearances areas, the new Backstage off-price format and the Bluemercury beauty, skin-care and spa business owned by Macy’s.
With Backstage, Lundgren acknowledged there is a “learning curve” involved with consumers getting familiar with the format, but he said it’s being rolled out, with six already inside Macy’s stores and nine more set for this fall. A seventh freestanding unit is also set to open this fall.
Macy’s sees 250 to 300 possible Backstage shops inside its stores. They are merchandised separately from regular Macy’s stores so the assortment is different with such categories as toys and gourmet food. In the off-price arena, Macy’s is playing catch-up to the competition, including the more mature Nordstrom Rack and Saks Off 5th chains.
He also cited “weak comps” in last year’s fourth quarter, leading to easy comparisons next year, and the unusually warm winter weather “presumably not likely” to reoccur next year. Lundgren said the company is betting on what’s been the weather pattern of the past 50 years “as opposed to betting on last year.”
“These are relatively easy ways to come back in terms of our overall performance,” Lundgren said.
During both his formal presentation to shareholders and meeting with the press, the ceo listed several growth opportunities. They include:
• Increasing the penetration of private brands as well as market brands and products sold exclusively to above the current 40 percent of Macy’s total business;
• Health and wellness, which includes increasing the number of Bluemercury freestanding stores to 115 by the end of 2017 and in-store shops to 22 by the end of this year;
• Approaching the wedding business in a “nontraditional, multifaceted way” focused on opportunities in rings, dresses, gifts for the wedding party, men’s wear, tuxedos and home goods for new households, in addition to the “already robust gift registry,” as a way to draw more Millennials to the store and potentially convert them into loyal shoppers.
Lundgren also addressed the issue of making Macy’s shopping more experiential, and said one way was to create “mini” flower shows at many Macy’s stores in addition to the handful of major presentations at the Herald Square and a few other flagships already. “Is this movement to experience permanent or not? It is hard to say,” he said.
With apparel sales weak at most retailers, Lundgren was asked if Macy’s is considering reducing its exposure to the category, which represents 23 percent of the retailer’s total volume of $27 billion. He said the 23 percent has “held fairly steady” and that there would be some reduction in space resulting from Backstage off-price areas taking some square footage. But he suggested no significant retreat. “I hope everybody else reduces their apparel and we will benefit from that,” Lundgren said.
Responding to a question about Amazon’s growing fashion business, Lundgren said it’s not important to be number one or number two in the standings, adding, “You just can’t chase after someone else’s strategy. You have to have your own.”
Lundgren did hint at the possibility of Macy’s exploring fast fashion. “We haven’t broken that code yet,” he acknowledged. Asked if Macy’s would consider operating Zara shops inside its stores, similar to how Nordstrom and Hudson’s Bay operate Topshop and Topman areas in some of their stores, Lundgren flatly replied, “No comment.”
He said for fast fashion, it would almost have to be a private brand approach to form a good strategy.
As is often the case, Lundgren was put in the position of having to defend the department store format, which has once again come under question in light of the recent poor results seen at Macy’s, Nordstrom, J.C. Penney and other retailers. “If department stores were not around today, someone in Silicon Valley or somewhere would be inventing them,” he said.
Department stores have challenges and need changes, he acknowledged, but “I don’t think the concept of department stores is going away.”
The meeting itself drew 225 Macy employees, about 75 shareholders, and only one question from the audience, which was more of an observation. Jim McKay, an architecture professor from Chicago and a regular at Macy’s annual meetings, said there are people in Chicago who still want Marshall Field’s back on State Street. It’s been Macy’s since shortly after Macy’s took over May Department Stores in 2005. The storm of protest over the conversion has died way down.
Behind the scenes, Macy’s has been under pressure from some activist shareholders to create more shareholder value by monetizing certain real estate, but there was no sign of that at the meeting.
Lundgren did address the issue, reiterating that Macy’s is “exploring partnerships or other joint venture arrangements for the company’s owned mall-based properties as well as Macy’s real estate assets in Manhattan, San Francisco, Chicago and Minneapolis.”
Last year, Macy’s sold the underutilized upper floors of the Seattle store for $65 million to a developer converting the space to offices. Macy’s still owns the lower floors for its store. In Brooklyn, the company struck a $275 million with Tishman Speyer to redevelop the space into a more compact, modern store, with offices above. This year, Macy’s hired Doug Sesler as executive vice president of real estate to explore real estate opportunities.
During the press meeting, Lundgren was accompanied by Macy’s chief financial officer Karen Hoguet. They were asked whether activist shareholders were satisfied with the steps being taken on the real estate front. “The shareholder base in total is quite pleased at how we are looking at real estate,” Hoguet said. “We have support across the shareholder base.”
“We are absolutely in control,” Lundgren added. “We are driving this process….It’s really important to have someone [with real estate experience] reporting to me.”
Lundgren also addressed rumors of his retiring from Macy’s. They come and go. Lundgren is 64 and has had a long, successful career with Macy’s, becoming president and ceo in 2003. “I plan to continue to have a long career,” Lundgren said tongue-in-cheek. “I want to get our comeback going in the right direction before you have me getting thrown out.”
Macy’s comparable sales were down 2.5 percent last year while earnings per diluted share decreased 14.3 percent. So far this year results haven’t been any better. The company has reduced its forecasts for the year, including predicting comp-sales down 3 to 4 percent.
“That’s not to say everything has been negative,” Lundgren said in his formal comments to shareholders. “Our very powerful digital business at Macy’s and Bloomingdale’s continued to grow by double digits, year-over-year. We significantly increased fulfillment capacity with a new direct to consumer megacenter in Tulsa, Okla. Merchandise categories such as active apparel, shoes, denim, furniture and mattresses have been doing great. We tested and vetted a variety of new and interesting ideas.
“So rather than fixating on the past, we are filled with ideas intended to drive the business forward.”
The last five quarters, he added, have “presented challenges that have caused us to pause, reflect and hit the reset button on our priorities and ambitions. But it was also instructive, forcing us to let go of some of the things that worked in the past…Agility has become a very important word in our corporate vocabulary.”
Lundgren also said, “We are letting go of initiatives that are not leading to long-term returns for shareholders.” Later, he declined to specify those initiatives.