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Macy’s CEO: ‘All of Apparel Remains Challenged’

Macy’s Inc.’s CEO Jeff Gennette said the company’s Polaris strategy helped it shift gears and adjust to the impact from the coronavirus pandemic, although he doesn’t see apparel sales in non-casual categories returning until the back half of 2021. Also, inventory levels in the home sector could see some pressures in the near-term due to continued virus headwinds.

In a Nutshell: “When Covid-19 unleashed its challenges, consumer trends shifted quickly. And we’ve learned a lot about our strengths and opportunities. Our Polaris strategy, designed to allow significant flexibility, was tested profoundly and proved durable, allowing us to adapt and innovate with great agility,” Gennette said Tuesday, noting that the company rapidly adjusted its merchandise mix to reflect consumers’ embracement of home, casual apparel and the jewelry and fragrance categories.

Gennette said investment in analytics and marketing outreach helped the retailer gain nearly 7 million new customers in the fourth quarter, with about 4 million from the digital channel and many of them under the age of 40, the targeted customer demographic as the retailer transforms product lines and digital operations to set the stage for growth. Gennette said that “solid holiday demand in November and December” continued into January, and that current sales momentum and profitability are due to investments in advanced analytics and enhanced collaboration with vendor partners to drive gross margin.

On Polaris, Gennette said the company will take bolder actions to drive the business forward as a digitally led omnichannel retailer, and that Macy’s has shifted a large portion of current and future capital to the digital supply chain and technology platforms. Those moves are to better integrate digital and physical assets and provide more relevant shopping experiences. He also said the company expects to grow sales from the digital channels to $10 billion over the next three years.

On merchandise mix, Gennette said: “I think all of apparel remains challenged. While we’re doing well in the casual categories, the dress categories remain depressed. Our inventory levels remain in line with sales. We have a ramp-up strategy with all of the relevant vendors, as well as our private brands. If we start to see improvements, as the vaccination starts to gain scale, and customers are starting to book events, weddings, you’ll start to see those businesses improve for us. So we expect the first half is going to be very similar to the fourth quarter, and the back half [is when] we’ll start to see an improvement in apparel.”

As for inventory levels, Gennette said Macy’s has some flexibility built into plans for where the it believes customer demand may go. “We’re going to be ready with putting receipts against that. We have not seen an issue with vendors, predominantly in the categories that are dormant right now. They do have inventory ready for us if we were to buy it. And so, when you look at all kinds of dress up categories, it’s predominantly a couple of very strong wholesale partners that we have deep relationships with,” the CEO said, citing an assortment mix that includes men’s and women’s suits and dress up accessories categories such as shoes and bags.

One area Gennette said the company has been focused on is its home inventories. He said the company has made adjustments that were needed in its private brands, particularly in its housewares offerings. Noting a supply chain issue it’s had with furniture and mattresses, Gennette said the mattress problem is “largely behind us,” although the furniture issue still persists. Demand is high and there are some supply issues with certain categories that are produced from Vietnam and China. Those issues should be resolved by the end of the first quarter, he said. Gennette also said its vendor direct program has been “quite strong for us,” with its partners providing a positive experience for customers with quick shipping.

On the supply chain and inventory platforms, Macy’s is planning on focusing on local needs and having more inventory in the right store locations to facilitate online order fulfillment as well as in-store pickup and same-day options.

Gennette called 2021 a year of recovery and rebuilding, which includes improving the functionality of the online site—a redesign will launch in the fourth quarter ahead of holiday—and more experiential shopping experiences, including content on the digital front. The company also plans to open 35 Backstage branded stores-within-stores in 2021.

Macy’s is on track to close the 125 locations disclosed last year. Sixty of the stores in C and D malls have been closed, and after the remaining sites are shuttered, Gennette said 85 percent of sales will be generated from stores in A and B malls.

Net Sales: The company said net sales for the quarter ended Jan. 30 fell 19 percent to $6.78 billion from $8.34 billion. Comparable sales were down 17 percent on an owned basis and down 17.1 percent on an owned plus licensed basis, a reflection of the continued challenges presented by the pandemic, the company said.

Digital sales in the quarter grew 21 percent, representing 44 percent of net sales. “Digital remained a growing and increasingly profitable platform,” Macy’s said. About 25 percent of the retailer’s digital sales were fulfilled from stores, including pickup and same-day delivery. It’s Star Rewards Loyalty program saw an increase of 45 percent of its Bronze tier members in 2020, a part of the retailer’s under-40 strategy. In addition, net credit card revenue of $258 million was up $19 million from the year-ago quarter.

Inventory in the quarter was down 27 percent from 2019 levels in the same comparable period. The company said it aggressively addressed slow-selling merchandise, reduced excess inventory levels and improved visual presentation in stores.

For the year, net sales were down 29 percent to $17.35 billion from $24.56 billion.

Earnings: Net income fell 53 percent to $160 million, or 50 cents a diluted share, from $340 million, or $1.09, a year ago. On an adjusted basis, diluted earnings per share was 80 cents for the quarter.

Wall Street was expecting adjusted diluted earnings per share of 12 cents on revenue of $6.5 billion.

Adrian Mitchell, chief financial officer, told investors that the quarter saw a lower rate of merchandise returns, due mostly to the shift in category mix and consumers’ more purposeful buying habits. But he expects the rate to go back to historical levels as apparel sales recover and consumers return to prior shopping habits. In addition, a reduction in the intensity of promotions, coupons and markdowns helped with sell-throughs that were closer to full price, all of which helped to support merchandise margins, he said. The company was also able to reduce delivery expenses from prior years by offering customers with store pickup options, he said.

For 2021 guidance, the company said it expects net sales of between $19.75 billion to $20.75 billion, or a 14 to 20 percent gain over 2020, with the percentage increase reflecting the lapping of a year of significant declines from the impact of Covid-19. Adjust diluted earnings per share was forecast at between 40 cents to 90 cents.

For the year, the net loss was $3.94 billion, or $12.68 a diluted share, against net income of $564 million, or $1.81, in 2019.

CEO’s Take: “As we look towards a healthier economy in the coming months and years, I am optimistic about the way we are reimagining and repositioning our business in line with our Polaris strategy. We have a strong focus on our customer and market trends. We are building our digitally-led omnichannel experience and we are well positioned to better capture customer demand across the total market from off-price to luxury and from offline to online. We know what’s important to our customers,” Gennette said. “And we will be in a better position to be increasingly relevant to the next generation of customers.”

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