For Macy’s Inc., 2020 is a year of “transition,” setting the groundwork for a return to growth in subsequent years, Macy’s chairman and chief executive officer Jeff Gennette told WWD.
And it’s a matter of focusing on the “healthy” parts of Macy’s — Backstage for off-price retailing; the six “destination” categories; “growth” stores; digital, and the loyalty program — while sharply reducing costs, inventory and the store base.
Also critical to reviving Macy’s fortunes is improving the ready-to-wear business. With the exception of dresses, rtw has been lagging for a long time, and going forward is seen representing a “slightly” smaller percent of the retailer’s total revenues, though still significant, Gennette said. Macy’s did not disclose its rtw volume.
“In 2021 and 2022, we expect to get back to topline growth in addition to bottom-line growth,” said Gennette, during an interview, after the company reported net income of $340 million for the fourth quarter ended Feb. 1, a steep drop from the $740 million earned in the 2018 fourth quarter, though the earnings beat analysts’ expectations.
Still, Macy’s stock was down 5 percent or 76 cents by mid-afternoon Tuesday, to $14.69.
Sales declined to $8.34 billion in the fourth quarter, from $8.46 billion in the year-ago quarter; comparable sales dropped 0.5 percent.
For 2019 overall, net income was $564 million versus $1.11 billion in 2018. Sales were $24.56 billion, including $6 billion in digital, versus $24.97 billion in 2018.
For 2020, Macy’s projects sales between $23.6 billion to $23.9 billion; comparable sales down 1.5 to 2.5 percent, and adjusted diluted earnings per share of $2.45 to $2.65, versus the $2.91 in EPS for 2019.
Macy’s first quarter will be weak as the store navigates disruptive staff restructurings associated with the retailer’s three-year “Polaris” strategy for cost savings as well as process changes and growth maneuvers, and tough comparisons to the first quarter of 2019, which was Macy’s best period last year. Gennette expects improved results beginning in the second quarter, as benefits from Polaris start to kick in.
The restructuring is massive. macys.com is relocating its digital and tech teams from San Francisco to Atlanta and New York City; Macy’s Cincinnati corporate office is closing, leaving Macy’s headquartered just in New York; 2,000 corporate and support staff are being let go, and over the next three years, 125 stores will close, leaving what Gennette sees as a more manageable fleet of about 400 department stores.
“Five years ago, we had 665 Macy stores. We will have eliminated 40 percent of the store portfolio since 2015, including the 125 closing over the next three years,” Gennette said.
Ten years ago, Macy’s had almost 1,000 department stores, as a result of its acquisition of May Department Stores in 2005. The deal added 491 department stores to the Macy’s fleet of 458 stores at the time, and saddled Macy’s with many weak locations that needed to be closed. Downsizing is also necessitated by the rise of the Internet and shifting consumer spending behavior.
Closing 125 department stores in the next three years means the Macy’s brand will have about 400 department stores remaining. Of those, Gennette said 50 percent are in A or A-plus malls where Macy’s is spending money on amenities, physical improvements and merchandise innovations, and where developers are also investing. By the end of 2020, 250 stores will receive “growth treatment” and remaining 150 stores will receive similar growth investments by the end of 2022.
Addressing the coronavirus, Gennette said it will have a small impact on first-quarter sales and that less than 50 percent of Macy’s private brands come from China. With products shipped from China, “we have a seen a slowdown but nothing concerning yet,” Gennette said. The virus’ outbreak began in late January in Wuhan City in the Hubei Province of China. It has spread to more than 30 nations and has led to fashion show cancellations and mounting concerns about the impact on retailing.
“We have 70 stores with a strong Asian customer base, like in Flushing [in Queens, N.Y.] or Union Square [in San Francisco] where we have seen some slowdown in sales but nothing to be concerned about yet.”
Gennette did say the coronavirus situation is “unfolding” and that Macy’s is working with market brands to mitigate the impact on product availability.
“Any affect of the coronavirus on our customers, colleagues and supply chain is not factored into our 2020 guidance,” Gennette said. “When I think about Polaris, that’s what factored into our guidance and the flow of performance, quarter by quarter.”
There are industry uncertainties associated with the U.S. presidential election in November and how politics could impact shopping. But Gennette, a longtime veteran of Macy’s, said, “I have yet to see an affect on our business [stemming from an election]. It’s not anticipated.”
Regarding efforts to revive the rtw business, particularly with styles for younger customers. Gennette cited some initiatives including:
• New 5,000- to 6,000-square-foot rtw areas targeting customers under age 40 and merchandised by categories and trends in the center of the space, and by big brands such as Guess and Nike along the perimeter. The format will reach 60 Macy’s locations in the summer. Six pilots were already launched, including at the Cross County Shopping Center store in Yonkers, N.Y. “We feel good about it. We’re in the iteration phase, but we are not declaring victory,” Gennette said. “We are getting more data points. It’s one area to address all of her rtw needs.”
• Two new private brands for the under-40 crowd are being launched this spring.
• Bloomingdale’s My List subscription rental business is adding 20 more vendors this year, bringing the count to 100. Gennette said it targets Gen Z and Millennials and a “big chunk” of those utilizing the service are new to Bloomingdale’s. For fulfillment and logistics, Bloomingdale’s uses Caastle.
• Macy’s has ramped up its partnership with ThredUp, which sells used clothing, to 40 doors. ThredUp is being tested in different spots inside the stores. “It does best next to juniors,” Gennette said. “Jackets are particularly strong.”
Rtw aside, Macy’s says it has six healthy “destination” categories: fine jewelry, men’s tailored, women’s shoes, dresses, big ticket and beauty.
“Taken as a whole, 2019 did not play out as we intended for Macy’s,” Gennette said. “We executed well during the holiday 2019 season. We were pleased with the significant trend improvement in the fourth quarter, including a meaningful sales uptick in the 10 shopping days before Christmas.…Importantly, we exited the year with a clean inventory position.”
Last quarter, Macy’s did best with men’s tailored clothes, women’s shoes and mattresses. On the other hand, fashion watches and housewares, both being planned down, did not fare well, as did some other areas of home. The Bloomingdale’s and Bluemercury divisions “performed within expectations in the fourth quarter,” Gennette said.
“We continue to see pressure on our margin rate due to lower-price merchandise sales and the growth of Backstage, but we hope to offset that through cost savings.…We are confident Polaris will change the trajectory of Macy’s profitability.”
According to Randal Konick of Jefferies Equity Research, “Cost savings as part of the Polaris strategy are encouraging, but ultimately we would like to see more encouraging topline momentum. The guidance was reiterated, which was a positive, but it embeds a back-half improvement and does not include any potential impact from coronavirus (which could affect tourism and supply), adding more risk to the story. While Macy’s is gaining traction with its various initiatives, we remain sidelined given secular headwinds. We believe realizing sizable, sustainable margin gains may be challenging as Macy’s invests in LT initiatives.”
Macy’s ended the fourth quarter with 551 Macy locations, 53 Bloomingdale’s locations including outlets and 172 Bluemercury locations.