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Macy’s Drops $3.5 Billion Bombshell as Covid Shreds Q1 Sales

Despite an eye-watering $3.58 billion first-quarter loss and a 45.2 percent decline in sales due to the impact of store closures from the coronavirus, Macy’s Inc. CEO Jeff Gennette said the company has both the financial flexibility and game plan to address any new COVID “increases in cases on a regional level.”

In a Nutshell: Gennette in the company conference call to Wall Street analysts reiterated that the impact from the coronavirus pandemic has Macy’s planning to operate as a “smaller, more leveraged company for the foreseeable future.”

Gennette addressed the nearly 4,000 job cuts announced last week, was mostly at corporate starting with vice president level and higher, and noted that most furloughed store associates will be back next week. About 20 percent of layoffs were at corporate, with a corresponding percentage at its Bloomingdale’s operation. While Gennette said no division within Macy’s was spared from the headcount reduction, private brands and digital drew fewer departmental cuts as the company intends to invest with the goal of becoming “best-in-class.” Macy’s instituted cuts at the managerial and director level at its regional leadership ranks as well, the CEO added.

Already into the second quarter, Gennette said nearly all of Macy’s stores have reopened, with initial sales trends coming in stronger than initial projections. However, continuing uncertainty around the pandemic has spurred the retailer to keep three points in mind for the remainder of the year.

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First, because the COVID pandemic is in full swing in some parts of the country,” Genette said, “we do not expect another national shutdown, but anticipate [some] regional impact. Most stores [are operating at] reduced hours and we remain flexible to meet demand” by closing down on a store-by-store rather than an across-the-board basis.

Plus, Macy’s has reopened some mall-based stores while the rest of the shopping center remains closed amid surging virus cases that are dampening store traffic, Gennette said.

And perhaps the biggest factor: urban flagships are slower to come back online, given how many big cities have emptied out in the outbreak’s wake while travel restrictions and fears continue to keep tourists away. These dense metropolitan areas have seen the “virtual disappearance of tourists and that’s not expected to recover anytime soon,” Gennette warned analysts.

On top of that, federal stimulus checks have helped Macy’s store and digital business afloat, and the retailer is keeping a close eye on patterns in customer behavior, Gennette said. Texas was one of the first states where Macy’s began reopening stores, he added, even before most of the malls had opened their doors while Georgia was second state for its reopening plan.

“What we’re seeing in Texas and Georgia is a three-to-five point sequential improvement,” Gennette said, noting that after Texas Governor Greg Abbott urged state residents to stay home nearly two weeks ago, the Macy’s saw a 15-point drop in brick-and-mortar sales in the state.

“It’s coming back a little bit,” the CEO said, adding that an uptick in digital sales couldn’t compensate for steep declines in brick-and-mortar sales.

The digital business has shown some signs of strength, and most encouraging has been the increase in new customer acquisition initiatives. “They are younger and more diverse than our core customer,” Gennette said, adding that the challenge will be in retaining and converting them to omnichannel shoppers, its most profitable customer profile.

Looking ahead, Gennette said the company is planning for the holiday season’s biggest shopping events. Acknowledging that it’s a “big concern of ours,” he said consumers might still be wary of gathering in large crowds come November and December. And Macy’s is reviewing its marketing calendar and looking at how to create fewer pressure points on sales days and ensure speedy digital fulfillment capabilities. All that will be centered on how the retailer “evens out demand,” Gennette said, adding that  Macy’s is considering demands for Cyber Week promotions and rolling out offers as early as Halloween.

The CEO said he expects the “speed and safety of curbside pickup will be big for holiday,” adding that he’ll reveal more when the company reports second-quarter results on Sept. 2.

Net Sales: For the quarter ended May 2, net sales fell 45.2 percent to $3.02 billion from $5.50 billion. Comparable sales at company-owned stores were down 45.3 percent, while comps were down 45.4 percent when including licensed operations.

Gennette said the soft home goods category has been strong, as well as active and casual apparel categories, which have been “stronger than they’ve been historically. Suiting, dresses, and social have taken a hit. Those categories will be compressed for awhile, but not forever, I don’t believe.”

He also said there have been “lots of vendor direct categories that are new,” and the company is looking at how to increase their presence at the store level. For now, Macy’s is focused on juicing its digital business to make up for brick-and-mortar losses.

“While it is encouraging to see continued improvement in sequential trends–and continued strength in digital–we expect continued uncertainty, execution risk related to restructuring efforts, and a challenging promotional environment to continue to pressure near-term stock performance,” Dana Telsey, chief investment officer at Telsey Advisory Group, said.

Earnings: The net loss for the quarter was $3.58 billion, or $11.53 a diluted share, against net income of $136 million, or 44 cents, in the year-ago period. On an adjusted basis, the loss was $630 million, or $2.03 a diluted share.

The company also reported on asset sale gains at $16 million, which added 4 cents a share. Impairment charges in the quarter were $3.18 billion.

During the call to Wall Street analysts, interim chief financial officer (CFO) Felicia Williams said the company took a $300 million inventory writedown on spring fashion merchandise for the first quarter.

“We are modeling various scenarios,” she said, noting that because the ongoing slow recovery may be impacted by regional flareups, “We are cautious about unpredictable headwinds in the back half of the year.”

Williams also noted that international tourism, which the company believes will be virtually nonexistent this year, represented 4 percent of sales in 2019, meaning that the impact on 2020 results will be significant.

For the second quarter, during which Macy’s began reopening stores, Williams said comparable-store sales are likely to be down in the 35 percent range. Merchandise margins have improved as well. By clearing out spring goods, the interim CFO said Macy’s will begin the third quarter in a “clean inventory position.”

There’s little certainty around when Macy’s might be able to determine how many more stores it might need to close and when. It already announced the closure of 125 neighborhood locations in February when it announced its Polaris strategy, though Williams said those doors are open and generating cash. She also said there’s too much uncertainty to commit to any definite level of store closures, which are a question of timing and not just the number of stores. The current competitive landscape gives Macy’s an opportunity to take some market share, and that needs to be taken into account before any final decisions are made, Gennette added.

CEO’s Take: “We are meeting our customers how and where they are shopping and have enhanced our fulfillment options and health precautions to ensure a safe and welcoming shopping experience,” Gennette said. “While we continue to see challenges ahead, we’ve taken the necessary actions to stabilize our business and give us financial flexibility. We are confident that we have the right strategy and plans in place to navigate the shifting retail landscape.”