A tough, highly promotional holiday season is ahead for sure, yet Macy’s Inc. expects to meet the challenge.
How will the company do it? It’s been gearing up with new merchandise strategies and fresh goods coming in for the fourth quarter, while working to pare down inventories in bloated categories lacking demand. The company also says it will have sufficient staffing to handle customer traffic, despite the nation’s labor shortage.
That assessment came from Jeff Gennette, the chairman and chief executive officer of Macy’s Inc., right after the company reported depressed second-quarter earnings and sales, lowered its forecast for 2022 overall, but said the Q2 results met expectations.
“Fifty-five percent of the content is going to be new, versus 25 percent in holiday 2019. We are happy with the composition.”
Gennette said that inventories will be in line by the end of the third quarter and remain so by the end of the fourth quarter. Retailers industry-wide have been grappling with bloated inventories due to lower consumer demand and supply chain issues easing.
In Q2, “Inventory was up 7 percent, but down 8 percent versus 2019,” Gennette said during the interview. “It is out of whack in some categories, but in hot categories business is up 8 percent and inventory is up 14 percent. I’m good with that. In 2021, it wasn’t enough.”
Inventory is flowing “faster and more complete than expected,” Gennette added. “Goods are arriving on time or ahead of time, and there’s the right number of boats at different ports. We’re in good shape. There is not much in the way of supply chain issues” anymore.
Gennette said with planning for the holiday season, the company looks closely at how Mother’s Day and Father’s Day fare. “A holiday is a pilgrimage for customers seeking gifts, and in terms of sales and traffic, the performance is often different from what happens in the third quarter. We look at brands, value, the newness and the trends that consumers care about, and we look at the opportunities that we seized upon or missed last year.”
For the quarter ended July 30, inflation, inventory gluts, markdowns and changing consumer behaviors dragged Macy’s Inc.’s net income down to $275 million, or diluted earnings per share of $0.99, from $345 million, or $1.08 a share, a year ago.
Adjusted diluted earnings per share of $1 compared to adjusted eps of $1.29 in the year-ago period, and $0.28 in the second quarter of 2019.
Operating income dropped to $399 million last quarter from $597 million in the year-ago period.
Total sales slipped to $5.6 billion from $5.65 billion; comparable sales fell 1.6 percent, though they were expected to fall 2 percent.
Wall Street reacted favorably to Macy’s beating its expectations, lifting the retailer’s stock 4.7 percent, or $0.88 a share, to $19.49, by midday. The stock is down about 30 percent since the beginning of the year.
“Add Macy’s to the list of retailers lowering guidance based on shifts in consumer spending and high inventory levels,” David Silverman, senior director, Fitch Ratings, said in a report. “While the company met its 2Q guidance, margin pressures are expected to reduce Macy’s earnings for the remainder of 2022 relative to prior expectations. Macy’s appears to be better positioned than other retailers, with 2022 operating income expected to be well above 2019 levels and quarter-end inventory up about 7 percent relative to 2021, a smaller increase than many of its peers.”
However, Gennette said Macy’s continues to rope in new customers, is well positioned to navigate the uncertain retail landscape, that luxury sales continue to be strong, and that the customers aren’t trading down, just being more selective in purchasing.
“We took our earnings [forecast] down because of gross margin pressures and the inventory we are liquidating,” Gennette said in the interview.
According to the CEO, holiday will start early again this year, in October. Macy’s, he said, will be marketing strongly around its Own Your Style campaign introduced last March. It’s a strategy geared to project some fashion authority and serve customers on a more individual basis. It has also involved revamping the website with simplified navigation, a refreshed, modern search bar and a personalized customer dashboard; forming a style crew for fashion tips, and is creating in-store areas filled with apparel and accessories designated as “must-haves.” Macy’s also changed its dress code for its colleagues, so they can better express their personal style and encourage customers to do the same.
Macy’s marketing will aim to reinforce the store’s reputation as a gifting destination, particularly for Christmas, and will be playing up the rollout of Toys “R” Us shops inside all Macy’s department stores by Oct. 15, through a partnership with WHP Global which owns Toys “R” Us. Ultimately, Macy’s sees toys as a $1 billion volume opportunity.
Gennette cited Macy’s upcoming online marketplace format, offering shoppers many more products than seen in the past, with such categories as pet supplies, toys, maternity, baby, home and electronics, as another important factor driving the business. “In the next couple of weeks we will bring it on, and add more and more content every day.” He said the company is bringing “hundreds” of new brands to Macy’s online. Next year, Bloomingdale’s will also shift to an online marketplace format.
During the interview, the CEO cited investments in pricing science, enabling the company to move from “broad base” promotions to more “surgical” pricing at the local level and at different times. “We are in the mid innings in competency with pricing science,” Gennette said.
Macy’s has also been investing in its media network, and talent.
Last quarter, performance by category was mixed, with a pretty clear split between “pandemic” categories that dragged, including sleep, active, casual sportswear, soft home and certain private brands, versus “occasion” categories that did well, including dresses, tailored menswear, shoes, fragrance, or as Gennette said, “Anything that is dress-up, wear-to-work or for social dressing.” Luggage was strong last quarter as well.
He did cite a noticeable consumer shift in discretionary spending away from goods and more to services and experiences, including entertainment, hotels, dining out, and airline tickets, impacting Macy’s numbers.
Gennette saw no significant change in what’s been a depressed level of tourist shopping since the beginning of the pandemic.
Still, Gennette did say that downtown department stores have been getting more traffic because of workers returning to their offices, a trend most noticeable at the Herald Square flagship in Manhattan, and at stores in San Francisco, Washington, D.C., and Boston.
In November 2021, Macy’s revealed it was raising its minimum wage to $15 across the organization and that it made a $35 million, four-year investment in new educational benefits. That’s apparently helped the company get past the nation’s labor shortage. “That’s behind us,” Gennette told WWD.
“There are still some pockets in some parts of the country where in some positions there’s more demand than supply, but it’s no worse than normal. We are in good shape. We are over suffering from the talent shortage.”
Macy’s Inc. chief financial officer Adrian Mitchell said in a conference call with Wall Street analysts, “The consumer is not as healthy as they were in prior quarters… facing higher costs on essential goods, especially groceries. Additional markdowns will be taken in order to end the year at appropriate inventory levels.”
He also cited an “anticipated elevated promotional environment and elevated fuel costs persisting.”
By division, Macy’s comparable sales in Q2 were down 2.8 percent; Bloomingdale’s comparable sales were up 5.8 percent; Bluemercury’s comparable sales were up 7.6 percent, and digital sales decreased 5 percent year-over-year while increasing 37 percent versus the second quarter of 2019.
Macy’s now forecasts net sales for the year overall will be in the range of $24.34 billion to $24.58 billion and adjusted earnings per share of $4 to $4.20.
That compares to the previous forecast of $24.46 billion to $24.7 billion in sales, and $4.53 to $4.95 in adjusted earnings per share.
“Our teams have consistently responded to the dynamic landscape with disciplined, data-driven actions to ensure the health and stability of our business,” Gennette said in his official statement on the quarters’ results. “We believe we are well positioned to respond to changing consumer behaviors. Despite inflationary pressures, consumers continued to shop Macy’s as a style source and leading gifting destination. Additionally, Bloomingdale’s and Bluemercury captured demand for luxury brands, resulting in both nameplates outperforming in the quarter.
“Over the past two years, our Polaris strategy has made us faster and more agile, which has been essential to navigate rapidly changing consumer trends and macro conditions,” Gennette added. “We expect to come out of this uncertain period in a strong position with a healthy balance sheet, new capabilities and a talented team ready to capture renewed demand.”