At Macy’s Inc., the numbers haven’t turned around yet, but perceptions are starting to.
Despite continued heavy losses and headwinds, Macy’s, according to its chairman and chief executive Jeff Gennette, is poised to grab hundreds of millions of dollars in market share from stores being closed by competitors, increase cost savings, commence holiday selling earlier this year, and test small store prototypes and unveil new private brands.
Macy’s has long been regarded as a retail dinosaur, but Gennette, during an interview Wednesday, portrayed the retailer as agile enough to navigate through the pandemic and adjust to shifts in what consumers are currently buying. He said the company performed better than expected last quarter, and that luxury sales had a surprising resurgence.
Some analysts and retail experts have lately expressed greater confidence in the company compared to seasons past, citing the store’s raising over $4 billion in debt this year to manage through the pandemic and stay liquid, and the potential to capture sales from J.C. Penney, Lord & Taylor and other stores closing in malls.
In addition, Macy’s, which generated $24.6 billion in sales last year, has been dramatically streamlining its headcount and store fleet, and is pivoting assortments to play up casual fashion and home-related merchandise while downplaying some categories that have lost appeal during the health crisis.
“The big question is, what are we facing with the consumer in the back half of the year? We are taking a conservative approach,” Gennette told WWD. “We’ve got a team that’s ready to react and totally focused on where the consumer is going.
“I’m very proud of the team and so happy about the way they have come together under extraordinary circumstances. It’s a much reduced team, but the ingenuity deployed to get us through this is a real point of pride,” Gennette said in the interview, just after the company reported a $431 million net loss in the second quarter ended Aug. 1, compared to an $86 million gain a year ago, and 35.1 percent decline in net sales to $3.56 billion, from $5.55 billion in the year-ago period.
On an adjusted basis, the Q2 net loss came to $251 million, better than what was forecast. Last year, Macy’s adjusted earnings in the second quarter were $88 million.
Comparable sales were down 34.7 percent but digital sales grew 53 percent, representing 54 percent of total owned comparable sales. Liquidity was also strong with $1.4 billion in cash at the end of the quarter, and about $3 billion of untapped capacity in the company’s new asset-based credit facility.
Gennette also told WWD that:
• Bloomingdale’s and Macy’s saw a surprising upsurge in luxury sales.
• Bloomingdale’s and Macy’s will next year test small store formats, requiring enormous editing and reimagining the selection.
• The redevelopment of the Herald Square flagship with an office tower has been put on hold due to the weakened state of real estate resulting from the pandemic, but not scrapped for good.
• Macy’s Thanksgiving Day parade is on but will be staged differently:”2020 needs these moments of joy,” Gennette said.
• Private brand penetration will represent 25 percent of total volume by 2024, up from the current 20 percent. “We are developing proprietary brands for those under 40. More news on that to come,” said Gennette. Key private brands include INC, Charter Club, Alfani, Style & Co., Hotel and Tasso Elba.
• The Backstage off-price division will test online selling for the first time. “It’s on the roadmap for 2021,” Gennette said.
The ceo sees Macy’s and Bloomingdale’s each picking up $200 million in sales from the spate of recent store closings around the country. Those sales will primarily come from mall stores being closed by J.C. Penney, Lord & Taylor, Pier 1, Neiman Marcus and Nordstrom. Macy’s already picked up some business from Bon-Ton Inc., which was liquidated.
“We look at every single closure, from J.C. Penney all the way up to Neiman Marcus, as an opportunity for our Macy’s, Bloomingdale’s and Bluemercury brands,” said Gennette. “There is big chunk of volume we are layering into our plan for the back half of this year as well as 2021.”
Gennette said the company will start its holiday push earlier this year, but declined to specify when. “Stay tuned. We are going to see more demand in November and maybe into October. There is uncertainty but over the past several months our teams have learned about working in this environment. The holidays are where Macy’s shines and 2020 will be no exception. Between Thanksgiving and Christmas is still incredibly important but we do expect consumers to to spend earlier.”
He’s sensing that due to COVID-19 health concerns, consumers will be gift shopping sooner to avoid the bigger crowds typically seen later in the season, and to get a jump at buying gifts priced for value. Retailers are planning inventories down in the fourth quarter, raising the possibility of hot items selling out.
Asked how he accounts for the rise in luxury sales last quarter at Bloomingdale’s and Macy’s, Gennette said, “A lot of customers had planned trips and would have been spending money on experiences.” Most of the traveling was canceled, creating bigger personal budgets for spending on products. He had expected headwinds in luxury and big-ticket spending due to declines in international and domestic tourism.
In luxury at Macy’s, diamonds, prestige fragrances, high-end mattresses, and big ticket items sold well last quarter. Macy’s also did well with high-end coffee machines and cookware, Gennette added.
At Bloomingdale’s, luxury sold well in designer and advanced contemporary fashion, designer shoes, handbags, beauty and home.
“People are looking around and treating themselves,” Gennette said, underscoring a perceived shift from spending on experiences to spending on products.
In the works is a Macy’s prototype, around 20,000 square feet and much smaller than its current smallest format at 80,000 square feet. Gennette also said that Bloomingdale’s will test a smaller format, too. Dallas, Washington, D.C., and Atlanta are the test markets. “Macy’s and Bloomingdale’s have high potential in off-mall and smaller formats,” Gennette said.
In the Dallas-Fort Worth area, a second Market by Macy’s store will open next year. The first one opened last February in Southlake, Tex., in a 20,000-square-foot contemporary format with a mix of branded and private-label fashion, products from local designers and direct-to-consumer brands, food, an apothecary, plants, home items, and a Herald Cafe.
Regarding the redevelopment of the Herald Square flagship, “the timing is in question right now,” Gennette said. “It may be delayed but it’s going to be an important project in the future. There is no better piece of real estate than Manhattan, and Herald Square is in its sweet spot….I’m very bullish on New York City coming out of this pandemic.”
Felicia Williams, interim chief financial officer, citing last quarter’s “up and downs,” said during a conference call with investors and retail analysts that “some aspects recovered more quickly than others. Stores reopened better than expected and luxury at Bloomingdale’s outpaced our expectations.”
On the down side, spending by members of Macy’s Stars Reward program lagged non-members; store sales declined 61 percent but improved as the quarter progressed; digital growth moderated and is expected to continue moderating in the fall, and men’s and women’s apparel, generally, was soft.
Best-selling categories at Macy’s were home, particularly housewares and textiles; fine jewelry; fragrances; activewear and sleepwear. The softest areas were men’s tailored clothes, dresses and luggage.
At Bloomingdale’s, aside from luxury, accessories, handbags, fine jewelry, women’s shoes, housewares, textiles and tabletops were strong.
Backstage suffered a 45 percent sales erosion due to temporary store closures but did do better than other areas of Macy’s department stores. Backstage’s stronger trends were in home, casual and basics, said Gennette.
Macy’s upped its estimate at annual cost savings to $2.1 billion by 2022.
Gennette said inventory is “in parity with the demand we expect in the back half…We have taken a conservative approach, have an upside scenario and a downside scenario.”
He expects digital sales to represent at least 40 percent of the business in the longer term, which will come with expected higher shipping costs but also margin expansion based on personalization, adding categories to the assortment including food and beverage and increased vendor direct selling. Gennette said 4 million new customers came to macys.com in the second quarter, and the group was more diverse and younger than the base previously. Personalization and the loyalty program contributed to the rise.
Gennette said he believes dresses and men’s suiting will come back, particularly dresses. “We are starting to see customers move to casual dresses. Career and formal dresses remain challenged.”
In footwear, “We are seeing a total shift to athletic and casual footwear on both the men’s and women’s sides.”
In stores, customers are “mission-based coming in for a transaction, and lingering less. We have higher conversion rates. We see big benefits in continuing stores,” said Gennette. “Thirty percent of digital transactions are fulfilled at stores, I see that increasing. There is also the immediate gratification of picking up something right away.
“Macy’s Inc.’s performance for the quarter was stronger than anticipated across all three brands — Macy’s, Bloomingdale’s and Bluemercury — driven largely by the sales recovery of our stores,” said Gennette.
“Restarting our stores’ business was our top priority, and we successfully accomplished that while also ensuring that our digital business remained strong.”