With first-quarter results thus far weak across the retailing sector, the scuttlebutt on department stores as “dinosaurs” has resurfaced and not surprisingly, Macy’s chairman and chief executive officer Terry J. Lundgren feels compelled to respond.
“Those pundits are out there saying the same thing — that no one will shop in department stores, in specialty stores. That no one is shopping in malls. They’re only shopping off-price. We heard the same thing in 2008 and back in 2001. They were wrong then. They will be wrong this time.
“Things are different from 2008,” Lundgren added, noting that the consumer and the economy are in better financial shape, and that Macy’s is aggressively reacting. “What’s not different is the response from the analysts, the television media and others who are calling for an end to shopping as we’ve known it.”
Just a couple of hours before his webcast to tens of thousands of Macy’s workers to discuss the company’s disappointing results, tactics ahead and to encourage everyone, Lundgren gave an interview on Wednesday on the status of the $27 billion chain and how it’s striving to regain the momentum it hasn’t seen for about a year.
Wednesday morning, Macy’s Inc. reported sharp drops in earnings and sales for the first quarter ended April 30, causing the stock price to plunge and analysts to fret over the future. Macy’s net income fell 40.4 percent to $115 million, from $193 million in the year-ago period, while sales dropped 7.4 percent to $5.77 billion, compared with $6.23 billion last year, partially reflecting 41 store closings in 2015. On the day, Macy’s stock fell 15.17 percent, or $5.61 to $31.38.
Macy’s was weakest in handbags, fashion watches, women’s shoes, children’s, men’s furnishings and luggage, and stronger in fine jewelry, dresses, active, fragrances, coats, men’s tailored clothing, housewares and furniture. Officials acknowledged some apparel offerings as duplicative and intend to focus more on “buy-now-wear-now” demands of consumers.
Macy’s reduced its forecasts for the fiscal year, saying that earnings per diluted share — excluding settlement charges — are seen ranging from $3.15 to $3.40, compared to previous guidance of $3.80 to $3.90. Comparable sales are seen declining 3 to 4 percent, compared with previous guidance for a 1 percent decline.
Other department and specialty store chains are also struggling and expected to report weak first-quarter results in the days ahead. Scoop said this week it was going out of business; Aéropostale filed bankruptcy this month, and on Monday, Gap Inc. said comparable sales for the first quarter fell 5 percent.
Asked how Macy’s stacks up against the competition, Lundgren noted that his company is out earlier than the competition in reporting the quarter, so it’s hard to give a precise measure. “My guess is on a two-year basis, we’ll be similar to others in the pack,” he said. “There will always be some that are better and some that are worse.”
For retailers, it’s somewhat puzzling why consumers aren’t shopping for fashion as much. “Clearly they’ve got discretionary income to spend,” Lundgren told WWD. “They’ve been spending on things they need — automobiles, home improvement, expansions and renovations. We’ve benefited from the furniture business. It’s been positive. But health care is way up and people are going out to dinner more often. There are a lot of places where they are spending their money, yet their savings [rate] is very high at 5 percent of household income….There is a malaise in the consumers’ mind-set here. There has not been a whole lot of confidence given to them. Do they feel confident about their jobs in the future? About the economy growing? As long as there is that lack of clarity, there won’t be this quick turn to more discretionary spending. They are buying things they need, continuing to save at very high levels, but they are not at the point of buying things they want.”
Spending by international tourists has also dried up, hurting many of Macy’s flagships. Lundgren recalled when not long ago, “international tourists would come to our stores without a lot of clothes, buy luggage and fill it up with our clothes. That clearly has reversed,” due to the strength of the dollar and the pressure on several foreign economies, including Russia, China and Brazil.
Macy’s executives do not expect to see a turnaround in international tourist spending this year. Sales on international tourist credit cards were down 20 percent in the quarter on top of a 21 percent drop last year in the first quarter.
“There are opportunities for us to get more from domestic tourists, who may live in Columbus, Ohio, and are visiting Orlando or Boston or New York,” Lundgren observed. “We are working with some credit card providers to connect with that consumer. What do they typically do when they are on vacation when they have time on their hands? What is appealing to them?”
Lundgren said Macy’s is making “a very strong push” to sell additional wearable-tech products, which could bring a higher percentage of younger people to the store.
He also said celebrity lines will play a greater role and that an announcement on another major collaboration will be made soon. Last week, Lady Gaga appeared at Herald Square flagship to unveil the Love Bravery limited-edition collection she partnered on with Sir Elton John, her sister Natali Germanotta, designer Brandon Maxwell and David Furnish. Twenty-five percent of each purchase from the collection will support the Born This Way Foundation, championed by Gaga, and the Elton John AIDS Foundation, chaired by Furnish.
“Love Bravery is off to a very good start,” Lundgren said. “David Furnish was so impressed with working with our team, he said he would love to do more in the future with us. We got the same response from Lady Gaga and her family. The Love Bravery product is in 150 locations now. That’s not a small number. It’s an important rollout. The idea of finding more and more unique reasons for consumers to come into stores is important.” Celebrity lines, Lundgren said, is “a space where we’ve had a lot of success.”
He listed other strategies being accelerated, including the jewelry pilot, tested in 40 stores in Southern California and expanding to 350 doors. “It’s a total transformation of the fine jewelry business,” Lundgren said. “We’ve traded up the assortment. There’s a bigger presentation and focus on engagement rings and diamonds. We changed the visual space and changed the way we pay the staff. We are treating jewelry like a specialty store.”
Lundgren said Macy’s is also working on a shoe pilot, similar to what happened in jewelry.
In addition, the company is seeking to further advance private brands as well as brands and products sold exclusively. Together, that represents about 40 percent of the business.
Also set for growth is the Macy’s Backstage off-price format that is seen inside six Macy’s stores, with nine more set to open this fall. There are also six freestanding Backstage locations, with one additional unit planned for the fall. If the format continues to resonate with consumers, Macy’s sees 250 to 300 possible Backstage shops inside its stores. They are merchandised separately so the assortment differs from the regular Macy’s stores, with such categories as gourmet food and toys.
Also getting rolled out: the Last Act centralized clearance areas, where goods are priced for clearance and don’t provide additional discounts or coupons; Bluemercury freestanding stores and in-store installations, and Impulse Beauty installations, which concentrate on smaller, newer brands.
“Most of these actions are expected to have a bigger impact in the fall, especially the fourth quarter,” said Karen Hoguet, Macy’s chief financial officer, during a conference call.
“Clearly our industry is in something of a rough patch. We know we are not alone, but the consumer seems to be doing OK,” Hoguet said. “Employment is steady and wages continue to rise. The consumer savings rate remains high and most macroeconomic indicators are better than flat. So it’s reasonable to conclude that the consumer will return to more aggressive discretionary spending at some point, hopefully sooner than later. We have always said that a down period in our industry is a great time to pursue gains in long-term market share….We have a lot of newness in our pipeline. Not everything will work, but we think our proposition to the customer will be fresh and compelling. We absolutely agree we need to work hard to make the bricks-and-mortar experience a lot more exciting. We are testing lots of concepts, including health and wellness.”
Macy’s is seeking to raise shareholder value through possible real estate ventures or other partnerships with mall-based and flagship properties, and to monetize unproductive real estate. Last month, under activist shareholder pressure, the company hired Douglas W. Sesler as executive vice president for real estate.
Regarding his webcast to workers, “I am very visible to the broader organization,” Lundgren said. “I do regular webcasts and talk to them very honestly about challenges and opportunities we have, and address many things not in our control, which I am happy to explain, and the things that we can control. I’d rather have them focus on things in our control, like Last Act, Bluemercury, our new Lady Gaga/Elton John collaboration. If we can put more and more of these kind of ideas into our system that consumers are responding to, we are likely to find success earlier than our competitors.
“One thing you can control is your attitude,” Lundgren added. “We’ve had lots of internal communication on that subject. I’ll do that today. I’m just very straightforward. I don’t hide behind bad news. I’m always ready to face it.”