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Could Macy’s Ambitious New Growth Plan Turn This Ship Around?

On Tuesday, Macy’s Inc. announced plans to close 125 stores, trim thousands of jobs and expand deeper into the off-price channel.

The changes are part of a new three-year strategic plan that also eliminates its Cincinnati headquarters in favor of offices in New York City. Macy’s said it will develop four high-margin, private-label power brands, each capable of driving $1 billion in annual volume, and upgrade its supply chain to match a new private-band sourcing strategy.

Dubbed Polaris, the plan is expected to create annual gross cost savings of $1.5 billion to be fully realized by the close of 2022, with $600 million gross cost savings in 2020 alone. Under the plan, Macy’s will streamline headcount by 2,000 positions, or 9 percent of its corporate and support function positions.

“We are taking the organization through significant structural change to lower costs, bring teams closer together and reduce duplicative work,” Macy’s chairman and CEO Jeff Gennette said, noting the “tough week” ahead “as we say goodbye to great colleagues and good friends.”

“I know we will come out of this transition stronger, more agile and better fit to compete in today’s retail environment,” he added, describing the streamlining as “deep” but “necessary.”

The company has a clear vision of where its key brands–Macy’s, Bloomingdale’s and Bluemercury–fit into retail today, Gennette said.

“We will focus our resources on the healthy parts of our business, directly address the unhealthy parts of the business and explore new revenue streams. Over the past three years, we have shown we can grow the top-line; however, we have significant work to do to improve the bottom-line,” he said. “We are confident the strategy we are announcing today will allow us to stabilize margin in 2020 and set the foundation for sustainable, profitable growth.”

Macy’s joins a growing list of merchant peers similarly investing in new strategies to serve new shopper behaviors, from Nordstrom’s local store strategy to Target‘s effort to to leverage it sprawling store base as the linchpin in a suite of omnichannel fulfillment services.

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“Macy’s, like its major department store competitors, is working to accelerate change after a weak 2019,” Christina Boni, vice president and retail credit analyst at Moody’s Investors Service, said, noting the retailer’s aggressive cost-reduction targets.

The department store chain has continued to pursue a conservative financial policy by reducing more than $2.7 billion in the debt over past three years, which has “provided support to its credit profile in the face of weakening operating performance,” she added.

Macy’s will record charges connected to Polaris in 2019, totaling between $450 million to $490 million.

What’s in store for stores

Macy’s said store closures will be concentrated in lower-tier malls, including the 30 closures now in progress, over the course of three years as it explores new off-mall formats. Doors slated for closure account for about $1.4 billion in annual volume, among the least productive of the retailer’s store base.

Across its store fleet, the retailer plans to adjust staffing with reductions in some stores and increases in others. One hundred stores are slated for upgrades this year under the “Growth” plan, including improvements to the physical store, as well as investments in merchandising strategies and technology improvements, among other initiatives.

To date, 150 stores have already been upgraded, accounting for 50 percent of 2019’s total stores’ sales. These same stores continue to “outperform” the balance of the fleet, Macy’s said.

Off-mall formats typically are smaller than mall-based doors. Macy’s is testing a new off-mall store format Market by Macy’s, with the first set to open on Thursday in Dallas. The concept–based on a 2018 test of retail-as-a-service shop in 13 stores–features a mix of curated Macy’s merchandise and local goods, as well as food and beverage options and a robust community events calendar, the retailer said.

“Our customers expect convenience and a tailored experience across all channels. We have an opportunity to build a broader yet integrated Macy’s experience within a metropolitan area by investing in our magnet stores, building freestanding Backstage locations and testing new, off-mall store formats,” Gennette said. “The more convenient, brand-right touchpoints we have, the greater loyalty and engagement we engender. This will enable us to grow with the next generation of American shoppers.”

Consolidating New York City

In closing its Cincinnati headquarters, Macy’s will also consolidate operations at its new home base in New York City. The company has been slowly migrating operations to Manhattan over the past several years, and now its digital HQ in San Francisco will also join the New York operation to facilitate better coordination, increased collaboration and better access to Macy’s brand partners.

Macy’s presence in the Atlanta area is set to expand and will serve as the retailer’s primary technology hub.

Macy’s off-price offerings in the form of Backstage and Bloomingdale’s The Outlet “have been a highlight of the company’s performance,” the retailer said. The company plans to expand Backstage over the next three years, with 50 Backstage store-within-store sites and seven freestanding, off-mall Backstage stores slated to open this year.

Supply chain upgrade

Macy’s is reshaping its supply chain to support omnichannel customer behavior and the company’s new retail ecosystem. A new private-brand sourcing strategy is expected to reduce costs and improve speed. Macy’s also will re-engineer its fulfillment network, which will improve inventory productivity through increased sell-throughs and lower markdown rates, the retailer said.

Reward program and organizational changes

In recognition of consumers’ changing loyalty habits, Macy’s plans to update its Star Rewards Loyalty program later this month, with a focus on building customer lifetime value and accelerating personalization and monetization programs. These changes are aimed at increasing the engagement of the occasional Macy’s customer and attracting new ones to the brand.

As part of the organizational changes, Macy’s has promoted former chief stores officer John Harper to chief operations officer. Marc Mastronardi, who was more recently senior vice president of store operations and customer experience, will report to Harper. Danielle Kirgan, chief human resources officer, is leading the transformation initiative and will take on the expanded role of chief transformation and human resources officer.

Financial guidance

Macy’s said it expects comparable sales for the fourth quarter to be down 0.5 percent for company-owned and licensed stores. It updated net sales estimates for the quarter at $8.3 million.

For Fiscal 2020, the retailer guided sales to the range of $23.6 billion to $23.9 billion, with adjusted diluted earnings per share between $2.45 to $2.65. At the end of its three-year plan, Macy’s expects net sales between $23.2 billion and $23.9 billion in Fiscal 2022, with adjusted diluted EPS between $2.50 and $3.00.

Macy’s will host an Investor Day report on Wednesday, and post fourth-quarter earnings on Feb. 25, 2020.