Traffic makes it's way past the Macy's flagship store, in New York. The company reported its second straight quarter of higher sales at existing stores after a three-year funk. Its shares surged nearly 9 percent Wednesday, and the stocks of other department store chains rose as wellEarns Macys, New York, USA - 16 May 2018

Macy’s is on a roll and believes investments in upgrading stores and online operations and services will pay off in the upcoming holiday season.

“We’ve got a good consumer environment in the fourth quarter. Consumer confidence is high. Spending is currently strong and expected to be strong,” Jeff Gennette, Macy’s chairman and chief executive officer, told WWD shortly after the company reported solid third quarter results on Wednesday. Wall Street appeared unimpressed as shares slipped 7.2 percent to $33.21.

Gennette said Macy’s dot-com business is “humming and the penetration of dot-com is higher in the fourth quarter. We’ve made significant improvements. The navigation is better and the content is more inspiring and richer.” Mobile sales are seen hitting $1 billion this year.

He also cited changes at Macy’s stores, among them the ongoing rollout of Backstage off-price departments and the Growth 50 strategy focusing on “magnet” stores ranging from 200,000 to 250,000 gross square feet. At these magnet stores, Backstage; big-ticket categories including enhanced furniture and mattress areas; more food and beverage; new lighting and flooring; renovated fitting rooms and restrooms, and additional amenities are being introduced. Macy’s spends about $2.5 million to $3 million elevating each of these stores and the Growth strategy is being extended to another 100 locations next year.

In other enhancements, At Your Service counters for pick-ups, returns, self-checkout and other services have been added to all 653 Macy stores and new technologies such as virtual reality in furniture and cosmetics departments are being added to encourage store traffic, reduce returns and make shopping easier.

Macy’s, like other retailers, is battling to win back consumers who are spending more on travel and experiences such as restaurants, shows, fitness and spas, and have defected from traditional retail to the many web sites, notably Amazon, that have mushroomed over the last decade.

This year, Macy’s has been competing effectively, as seen by its net income, which in the third quarter ended Nov. 3 more than doubled to $62 million, up from $27 million in the year-ago period, and up from $15 million in the 2016 period, though in the third quarter of 2015, the net was $117 million.

Comparable sales rose 3.3 percent for the three months while total sales increased to $5.4 billion from $5.28 billion. Gennette said Macy’s has benefited from the liquidation of Bon-Ton Stores, but has seen little benefit from Sears and Kmart closings this year.

Based on the performance, which beat expectations, and momentum going into the fourth quarter, the $25 billion Macy’s raised its annual sales and earnings guidance. Comparable sales for 2018 are seen increasing 2.3 percent to 2.5 percent from previous guidance of 2.1 percent to 2.5 percent. Net sales are now seen rising by 0.3 percent to 0.7 percent for 2018, from earlier expectations of being flat to 0.7 percent ahead, while diluted earnings per share are now seen at $4.10 to $4.30, versus the previous guidance of $3.95 to $4.15.

Macy’s also has a strategy to invest more in its 11 flagship stores, though details on that plan weren’t spelled out.

Jeff Gennette attends Macy's Sean John press conference at the Standard Hotel.Macy's Sean John Press Conference, New York

Jeff Gennette  Aq/Penske Media/REX/Shutterstock

Gennette did get specific on the company’s strategy for its “neighborhood” stores, which are smaller than the magnet stores and generate less business. “Dollars per square foot are lower. We are looking to correct that,” the ceo said. Objectives for the neighborhood stores  entail making them “easy and efficient to get in and get out,” Gennette said. Some space in the stores could be converted to Backstage, lease shops, for fulfillment or simply left vacant, he said. Neighborhood stores have a higher penetration of customers taking advantage of buy online, pick-up in store, and buy online, ship to store services, Gennette said.

Asked what merchandise is being played up more for holiday this year, Gennette cited signature and logo product and vintage looks. Additionally, “Fine jewelry is going to have another fourth quarter of comps and we expect strong fragrance comps,” Gennette said.

The ceo also suggested that cold weather fashion, particularly women’s coats where the average unit retail price is up $10, should be strong.

Macy’s showed gross margin improvement last quarter due to greater full price selling, and better use of analytics to shape the inventory and the pricing. The gross margin rate rose to 39.9 percent from 39.4 percent in the year-ago period.

Despite the improved margins and higher full-price selling, Gennette said he expects about the same level of promotional activity at Macy’s, but stressed that the promotions have been simplified and are easier to understand. “We don’t have as many overlapping promotions. Values are clearer. The events are very potent,” Gennette said.

With the nation’s tight labor pool, many retailers are expected to be caught short on help for the holiday season. “We are actually ahead of schedule in terms of hiring temporary help,” Gennette said, adding that the company anticipated the tight labor market and has had less turnover of permanent staff.

Women’s sportswear continues to be soft at Macy’s, though Gennette said dresses, coats, suits, active, classification businesses and private brands in sportswear have been good.

He acknowledged that women’s sportswear “is still not keeping pace with what’s happening in men’s and kids’ sportswear.…It’s a very competitive field out there,” Gennette said.

During a conference call, Gennette said Macy’s, Bloomingdale’s and Bluemercury all performed well. With the mobile business, “We invested early and our mobile app keeps getting better. We view the app as indispensable.”

Gennette also said Macy’s loyalty program, which was overhauled last year, is “delivering results” with platinum customers, those spending the most at Macy’s, showing a great response to exclusive experiences including special access to the Thanksgiving Parade and other events like cooking classes and fashion shows.

Macy’s added 121 Backstage locations this year, bringing the total to 166. “We continue to see a lift in sales across the entire store when we add Backstage,” the ceo said.

The retailer is also growing its vendor direct program which has led to a doubling of stockkeeping units online since the program was launched last April.

“Strategic initiatives are up and we’ll feel their full weight in the fourth quarter. Associates are motivated,” Gennette said. “Investments have touched really all stores.”

Last quarter, the best-performing areas were men’s, kids, fine jewelry, women’s shoes, fragrance, coats and active, while women’s sportswear and fashion watches were weak.

Macy’s is up against comp-store sales growth in the fourth quarter of last year.

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