Macy's on Herald Square in ManhattanMacy's on Herald Square in Manhattan, New York, America - 07 Jan 2016After a disappointing 2015, Macy's plans to restructure its business and eliminate more than 4,500 positions. The retailer announced the locations of 36 stores closing across the U.S.

“We don’t have our heads in the sand as to the significant challenges.”

So said Jeff Gennette, Macy’s chief executive officer since March 23, during an investor conference call Thursday, sounding determined to effect change and reverse the negative trends at Macy’s after the company reported a 39 percent drop in net earnings and a 7.5 percent decline in sales for the first quarter ended April 29.

Macy’s stock fell 16 percent, or $4.7o, to $24.64 by early afternoon, dragging down the shares of most other retailers and many vendors in the process.

“I’ve really been listening to our customers, brand partners, associates and to our investors,” Gennette said, giving some sense of his priorities since taking the helm. He’s talked with frontline associates in weekly “unannounced” visits to stores and learned, Gennette said, that what’s working is “where we have clear value, exclusivity. Simple is working. We need to get bigger meals out of fewer things. Make it easier to shop.” He said Macy’s associates “are telling us to prioritize. Give us clear direction and get out of the way so they can move quickly.”

During the call, Gennette, along with Karen Hoguet, Macy’s veteran chief financial officer, outlined Macy’s priorities and strategies to reverse the negative trends. Comparable sales were down 4.6 percent on an owned plus licensed basis last quarter, though the digital sales component was up double digits. Central to the strategy is “stabilizing brick and mortar and growing digital and mobile business,” Gennette said.

He’s created an internal task force to work with brand partners to explore ways to reshape the store experience and he expects by the end of 2018, Macy’s will have “a scalable model that really addresses the experience needs,” which would include such ideas as making the checkout easier and escalating Bluemercury spa services.

The two top Macy’s executives cited other 2017 priorities, among them:

  • Debt reduction.
  • Partnering closer with mall developers on ways to drive greater traffic and increase conversion.
  • Rolling out fine jewelry and shoe pilot programs, and expanding furniture and mattresses to 60 stores.
  • Re-engineering Macy’s marketing machine so the messaging is less promotional and more about products, fashion trends, newness and exclusives. “We will forever be a promotional department store,” Hoguet said, adding, “In some cases we over-communicate in a certain promotion. This is really how we are reallocating how we spend and talk to the customer. Don’t read this as being less promotional.”
  • Capitalizing on opportunities where the real estate value exceeds the retailing value, by either selling or leasing out space.
  • Amplifying exclusive offerings including private brands and designer capsule collections, including currently the CR by Cynthia Rowley collection and an Anna Sui collection later this year. “Expect us to flex some muscle here,” Gennette said.
  • Continuing to roll out Backstage off-price areas inside Macy’s stores where there’s excess or unproductive space. There are 26 Backstage areas inside Macy’s and 19 more will be added this year.
  • Becoming a bigger part of the community, through volunteerism and engagement.

Last quarter, the best-performing categories at Macy’s were women’s apparel, specifically active and dresses; fine jewelry; fragrances; women’s shoes, and furniture and mattresses. On the other hand, handbags, fashion jewelry, watches, housewares, tabletop and color and treatment were weak, though Bluemercury and the Impulse department have been exceptions. There are particular margin pressures in beauty, fashion watches and housewares.

Macy's at The Bloc in downtown Los Angeles

Macy’s at The Bloc in downtown Los Angeles. 

According to Hoguet, the first quarter is expected to be weakest of the year, and the business trend improved in the second half of last quarter.

On the marketing side, Hoguet said a new strategy will appear in the third quarter. “Our current model is too heavily weighted to promotional marketing. Starting this fall it heightens engagement with key brands, highlighting trends, exclusive products and newness. We are also evolving the media mix.”

“These are unusual and challenging times for retail, especially for mall-based department stores,” Gennette said, adding that the issues are secular not cyclical. “We have known for some time the U.S. is overstored. It’s not surprising to see some contraction.”

For Backstage, he said Macy’s has been carving out a big cavity of real estate in certain units and has been “very careful about cannibalization” by putting categories in Backstage that weren’t in the balance of the store, including home decor, toys, baby products and certain opening price points such as in cosmetics. Where there’s Backstage in a Macy’s full-price store “the entire building is lifting by a very nice level,” Gennette said, adding that Macy’s core customer is shopping Backstage. “The home run will be if you get a new customer to come into the building because of Backstage.”

Macy’s has a separate team focused on off-price, the bulk of whom came from the off-price world. “It’s way too early to declare victory, but at the end of the day we hope to have a viable off-price concept that is on the mall. Most of our ferocious off-price competitors are off-mall,” Gennette said.

Macy’s pilot shoe format in varying degrees is being rolled out to all Macy stores. Citing some differences in the new format, Gennette said the team has been “making sure we have the right brand curation, really standing for the trends, instead of having everything from each brand, segmenting brands that matter the most and merchandising everything else by classification.”

In fine jewelry, Gennette said Macy’s “raised the amount and caliber of goods, really went after bridal and doubled the number of sales associates in a number of doors.”

Macy’s has been dealing with tough competition from Amazon and off-pricers and hesitant consumers, as well as some internal issues of its own. For the quarter ended April 29, the retailer’s net earnings came to $70 million versus $115 million in the year-ago period. Sales reached $5.34 billion versus $5.77 billion a year ago. The decline in total sales reflects, in part, store closings revealed in 2016.

Comparable sales were down 4.6 percent on an owned plus licensed basis.

The first-quarter results include real estate transactions of $96 million which were booked at $68 million, including $47 million from selling the downtown Minneapolis property. Macy’s plans to sell two more floors of its downtown Seattle store after having sold floors five through eight in 2015. This transaction is expected to close in fall. Looking ahead, Macy’s affirmed previous guidance of comparable sales, both owned and leased, declining between 2 percent and 3 percent this year. Total sales are expected to be down between 3.2 percent and 4.3 percent. Total sales for fiscal 2017 reflect a 53rd week, whereas comparable sales are on a 52-week basis.

Excluding the sale of the Union Square men’s building in San Francisco, anticipated settlement charges related to benefit plans and premiums and fees associated with debt repurchases, adjusted diluted earnings per share of $2.90 to $3.15 are expected in 2017. Last year, earnings per diluted share on an adjusted basis were $3.11.

In the first quarter, the company opened Macy’s stores in Murray, Utah and Los Angeles, as well as 10 freestanding Bluemercury beauty stores and 11 Macy’s Backstage off-price stores inside existing Macy’s stores. Additionally, one Bloomingdale’s store opened in Kuwait under a license agreement with Al Tayer Group.

Macy’s is closing about 63 stores this year, and will shutter about another three dozen over the next few years. Most recently, the company added its store at Temple Mall in Temple, Tex., and another at the Mall at Tuttle Crossing in Dublin, Ohio, to the list of planned closings.

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