From softness in women’s wear to the threat of tariffs on apparel, Macy’s Inc. has plenty of challenges and hurdles ahead.
But the department store remains on track meeting financial goals and maintaining a healthy balance sheet, is off to a “good start” to 2019 and has a “clear line of sight into profitability growth.”
That was the main message from Jeff Gennette, chairman and chief executive officer of the $25 billion department store chain, which on Wednesday reported a slight decline in net profits during the first quarter due to an 80 basis point drop in margins including higher delivery costs and a slight increase in SG&A. Further margin compression is expected, though not as bad in the second quarter, resulting from markdowns to clear out higher than expected spring inventories. Total sales slipped a bit to $5.5 billion from $5.54 billion in the year-ago period.
On the brighter side, comparable sales rose 0.7 percent and earnings on a per share basis at 44 cents beat Wall Street estimates by 10 cents. Last year, the company earned 48 cents in the quarter. There was also a $43 million lift from asset sales, involving a few stores.
“Overall, the quarter met our expectation and we are on track for our annual top line and bottom line guidance,” Gennette told WWD during an interview.
Macy’s is looking to monetize its most important physical asset: the giant Herald Square flagship. “It’s true we are looking to monetize the shareholder value by building a tower atop the main Broadway building,” said Gennette. “We’ve got a lot of work to do on this before we can discuss with more color what happens. We are deeply involved in conversations with developers and our city partners.”
On lifting the women’s business, Gennette said, “We are not as relevant as we need to be with females under 40. We need to be very focused on getting her back.” She’s there in handbags, fragrances and dresses, Gennette said, but the challenge is to get her to shop the sportswear and beauty areas.
“We have lots of tests coming this year” to attract more women to the store, Gennette said, involving new fashion brands and products. Gennette said young women want mix and match, trends and high-low pricing, and that Macy’s challenge is to figure out how to showcase all that. “There needs to be new content with new trends. This customer is looking for newness. We’ve been stale.”
Gennette was clearly concerned over the possibility of the government slapping on a 25 percent tariff increase in apparel and accessories. So far, the tariff situation has impacted Macy’s furniture business, but Gennette said that’s a “small piece of our overall business.”
“This is a dynamic situation, but let me give you a high-level view,” he said during a conference call. “The three tranches of tariffs that were enacted in 2018 have no meaningful impact in our business and were factored into our 2019 guidance. The increase of the third tranche does have some impact, particularly on our furniture business. [But] the team anticipates that this can be mitigated.
“If the potential fourth tranche of tariffs is placed on all Chinese imports, that will have an impact on both our private and our national brands. We would work with our manufacturing and brand partners to minimize the impact to our customers. This potential fourth tranche of tariffs was not contemplated when we provided the annual guidance. We are hopeful that trade talks between the U.S. and China will continue productively and the trade actions between the two countries will de-escalate.”
To deal with tariffs, Gennette said Macy’s would first see if price increases could be passed on to consumers, to keep the same level of margin. “If the customer responds poorly, we will have to mark down. In some cases, I do believe the customer will accept the higher ticket.” In other cases, Macy’s will work with manufacturers to see if they can absorb the increase.
Adjusting to tariffs, “starts with what’s the anticipated behavior of the consumer,” Gennette said.
“If there is fourth tranche, it will affect a lot of the apparel and accessory categories coming in. It’s too early to see what categories will be more affected than others. It’s hard to get the math to a place where you don’t have a customer impact.”
Macy’s has been moving production out of China for a number of months, but Gennette said, “It’s still an important part of our mix.” The company has also been consolidating production to reduce the number of vendors it works with in China, while increasing business and leverage with those it continues with.
Last quarter, Macy’s, Bloomingdale’s and Bluemercury “performed to expectations” though the company does not break out results by division. Bloomingdale’s outlets also had a good quarter.
The Backstage off-price departments are inside 173 Macy units — another 50 are planned for this year — and continue to perform well. Comps at Backstage are driving comps at the entire store, Gennette said. He also said the first warehouse dedicated to Backstage will be up and running in the third quarter. It will be in Ohio. The strong Backstage performance was a factor in Macy’s average unit retail price declining 2.7 percent.
Macy’s e-commerce had another quarter of double-digit growth, and the growing vendor direct program made a “meaningful contribution” to the retailer’s results, Gennette said. The plan with vendor direct in 2019 is to add another million stockkeeping units on the top of 1.5 million in 2018, and work with 1,000 vendors this year, versus 700 in 2018.
Mobile is Macy’s fastest growth channel, exceeding $1 billion in sales last year. However, sales with international tourists were down 3.1 percent in the quarter.
Macy’s launched Story inside 36 stores last March. “We are pleased with early response from customers,” Gennette said. Story, which changes its theme and merchandising every two months to 10 weeks, has a “robust” calendar and community outreach plan, he added.
Macy’s best-performing categories were dresses, fine jewelry, men’s tailored clothes, women’s shoes, active, kids, fragrances and skin care, while color, spring sportswear and handbags were weak.
Gennette didn’t blame the cold and rainy spring weather on the apparel results. “We don’t think weather had an impact on sales. Warm weather did not sell as well but we made up for that with the sell-through of our winter inventories.”