After a less-than-stellar Christmas season, Macy’s Inc. is streamlining management and anticipating modest sales growth in 2019.
“We expect to have growth this year on top of growth last year,” Macy’s chairman and chief executive officer Jeff Gennette told WWD, just after the company released results for the fourth quarter and 2018 and projected that in 2019, comparable sales will be flat to 1 percent ahead.
At least 100 executives at the vice president level and higher are being let go, with the majority gone by March 1.
WWD has learned that among the high-profile executives departing are chief operations officer Robert “R.B.” Harrison, and Justin MacFarlane, chief strategy, analytics and innovation officer.
In addition, Molly Langenstein, general business manager for ready-to-wear, is leaving the company, though Gennette said it was her decision to leave.
Macy’s said the streamlining will lead to $100 million in savings, though some of that will be from other cost-saving measures outside of the executives leaving.
Gennette declined to say what percentage of management the 100 executives departing represent. “It’s a big chunk,” he said during an interview. “Decisions like this are never easy.”
But Gennette said the company continues to be “well-managed” and that it is preserving “customer-facing colleagues.”
He also said the key leaders will be shifted to expanded roles to support growth strategies and the streamlining will help the company move faster to change and respond to customers, as well as cut costs.
Looking ahead, Gennette told WWD, “It will be a heavy investment year for Macy’s.”
He said Macy’s Growth 50 store enhancement program is broadening to 150 stores. The vendor direct program will add many more suppliers, categories and stockkeeping units with the buildup in electronics, toys and games, home decor, outdoor entertaining, organization, pet products, sporting goods, baby products and cleaning equipment. Gennette said 1,000 vendors will be on board this year, versus 700 in 2018.
The company is also investing to sustain double-digit growth in mobile sales, which represent 10 percent of Macy’s digital business. Easier payment procedures, improved shopping experiences and style advice are on the agenda.
Another 45 Backstage off-price departments, on top of the 165 already operating inside Macy’s stores, are seen opening this year, and to support the growth a Backstage warehouse in Ohio will begin operating in the third quarter.
In the Macy’s stores where they’re situated, Backstage departments give about a 5 percent lift in the overall business. “Cannibalization is not the factor that we once feared,” Gennette said. Still, the look of the Backstage departments hasn’t done much for the Macy’s aesthetic. Responding to that, Gennette said Backstage just re-branded with new graphics, a new tag line, a blue color palette and layouts are being examined for possible changes.
For the fourth quarter and year, Macy’s results were mixed.
In the quarter, net income dropped to $740 million from $1.34 billion, but adjusted earnings per share came in at $2.73, above the $2.53 expected.
Total revenues reached $8.46 billion, down from last year’s $8.67 billion but slightly above the $8.45 billion expected. Comparable sales rose 0.7 percent.
The best-performing categories were men’s tailored, fragrance, skin care, women’s shoes, active, fine jewelry and furniture. On the other hand, women’s sportswear, handbags and color cosmetics did not perform well.
For the year, net income dropped to about $1.1 billion from $1.56 billion, while net sales were up slightly to $24.97 billion from $24.94 billion in the year before. Comparable sales rose 2 percent for the year. Cash flow and gross margins, partially affected by rising fulfillment expenses, were down last year. Macy’s sees most of its gross margin pressure in the first quarter, and sequential improvement over the course of this year.
Explaining the retailer’s cautious outlook for the year, Gennette began by saying he believes customers are still healthy, financially speaking, but that uncertainties on how much they will get in tax refunds, the political climate and to some degree tariff issues could impact spending. Also, he mentioned that international tourism still being down around 4 percent — similar to fourth-quarter levels — and the disappointing 2018 holiday outcome are factors in the company’s cautiousness. Aside from the modest sales projection, Macy’s is forecasting inventories up in the spring, but down by yearend and some near-term pressure on margins, partially due to increases in fulfillment costs.
Many other retailers have also reported weak holiday sales, with the usual lull between Cyber Week and Christmas Day deeper than expected. Gennette did say some of the Macy’s shortfall resulted from a change in a Cyber Week promotion to target loyalty customers, rather than being open to all shoppers, which Gennette acknowledged as a mistake. There was also a fire at a distribution center. “The incident put pressure on our fulfillment network and caused a portion of inventory to be unavailable during Cyber Week.”
With a year of investment ahead, Macy’s has upped its capital expenditure program to about $1 billion from $950 million last year and $760 million in 2017.
The Growth 150 program entails spending $3 million per store, on average, to enhance facilities and amenities, such as lighting bathrooms and “At Your Service” stations, while expanding assortments with new brands, training management “to drive a high-growth culture,” enhancing the commissioned workforce, adding special events, trunk shows and marketing. “It’s a fully integrated approach,” Gennette said.
Macy’s characterizes the 150 stores as “magnet” units. They account for two-thirds of Macy’s overall brick-and-mortar sales. Macy’s also operates “neighborhood” stores, as well as flagships in major metropolitan areas. “We will test and iterate to find the right approach to neighborhood stores,” Gennette said. “It’s early days.”
Macy’s Herald Square flagship will be redeveloped, but details on the extent of it won’t be disclosed until late this year, Gennette told WWD. There is a plan figured out and the team will be taking it to civic and community leaders for feedback. “We got a solid plan we are working with,” he said. “For the past year and a half, we have been developing many, many versions of what we want. There are big changes…Herald Square definitely is staying open. It’s incredibly important to our brand, our customers and to the neighborhood. We have been exploring a full menu of alternatives. It could lead to a densification. But we are certainly going to preserve the store. We are doing this one carefully.”
In reviewing 2018 overall during a conference call with investors and analysts, Gennette said all three Macy’s Inc. brands — Macy’s, Bloomingdale’s and Bluemercury — delivered “solid results.” He said Bloomingdale’s was “reenergized” and that its 59th Street flagship, which has been steadily renovating selling space, had its best year since 2013.
Bluemercury’s sales were up by double digits and 26 stores were opened, and Macy’s continued with its strategy of making balanced investments in growth areas, Gennette said.
“Improvement in the health of our brick-and-mortar business is very encouraging,” Gennette maintained.
Backstage opened 120 new departments at Macy’s stores, bringing the total to 165. “It was a heavy lift.…We are getting better at off-price every day,” Gennette said.
Mobile is the corporation’s fastest-growing channel for sales, and Macy’s dot-com business has yielded 38 consecutive quarters of double-digit growth, Gennette said.
Though industry observers still believe Macy’s has many weak stores and could close more, Gennette said the Macy’s fleet is improving. “We are a stronger company than a year ago.”