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Macy’s Sees ‘Slowdown of Product’ From China, Though Nothing ‘Concerning’ Yet

Macy’s fourth-quarter results were better than Wall Street had expected, but questions remain over whether its new three-year Polaris turnaround plan will pan out.

In a Nutshell: While the retailer did better than expected, it also reiterated the plan and annual estimates that it provided on Feb. 4 when it disclosed its new three-year strategy called Polaris. The plan relies on five components: strengthen customer relationships, curate quality fashion, accelerate digital growth, optimize the store portfolio and reset the cost base.

“We were pleased with the significant trend improvement in the fourth quarter, including a meaningful sales uptick in the 10 shopping days before Christmas. Together with disciplined expense management, our solid sales results in the fourth quarter allowed us to deliver stronger-than-expected earnings results. Importantly, we exited the year with a clean inventory position,” Jeff Gennette, Macy’s chairman and CEO, said.

But it appears Wall Street wants to see some hard evidence that the plan will drive topline sales.

Jefferies analyst Randal J. Konik has a “Hold” on shares of Macy’s stock. “While Macy’s is gaining traction with its various initiatives, we remain sidelined given secular headwinds,” he said.

He didn’t like that gross margin was down more than 60 basis points in the quarter, marking the sixth quarter in a row of gross margin declines. “This was due to delivery expense as well as the growth of lower-margin businesses, which is expected to continue to be a headwind,” Konik said.

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Macy’s guidance projects improvement throughout the year, Konik said, but with the strongest growth in the second half.

“With potential coronavirus headwinds, international tourism issues, and declining mall traffic, we continue to see risk ahead,” Konik said.

During the conference call to Wall Street analysts, Macy’s executives addressed the possible impact from the coronavirus, officially named COVID-19 by the World Health Organization.

“While still too early to estimate, we anticipate that there could be a small impact on first quarter sales from international tourism. With respect to the supply chain, we are working with our vendor partners to minimize any possible disruption,” Paula Price, Macy’s chief financial officer, said. “As we’ve said before, less than 50 percent of our private brand goods come out of China. Our vendor partners source a sizable amount from there, too.”

As with tourism, it’s too early to determine what the possible impact on the supply chain could be, she continued, confirming that the company has “not factored in any potential negative impact from the coronavirus into our 2020 guidance.” While the team “entered 2020 with confidence in our future, [we] are clear-eyed about the challenges before us…” Price added.

“We have seen a slowdown of product that’s flowing out of China, nothing concerning yet. And we’re watching this one very, very carefully,” Gennette said, adding that the tariff situation over the past 18 months gave Macy’s a “very clear line of sight into our product flow from China for both our national and our private brands.”

The retailer is working with its suppliers and knows which goods have been finished and which ones are in process, as well as “fabric that’s been allowed to current and future deliveries. So we’re looking at all of that,” he added. “We’re managing that receipt flow.”

Net Sales: For the quarter ended Feb. 1, net sales were down 1.4 percent to $8.34 billion from $8.46 billion. Comparable sales for owned and licensed stores were down 0.5 percent for the three-month period.

The holiday season was helped by strong customer response to the retailer’s gifting assortment, and by its destination businesses, top growth locations and its off-price Backstage operation. The destination businesses include dresses, fine jewelry, big ticket, men’s tailored, women’s shoes and beauty.

Last year, the company added 100 stores to its top 150 growth list, Gennette told analysts. “Comparable store sales at the original 50 growth stores outperformed the Macy’s fleet by approximately 3.5 percent in 2019,” he said.

“In 2019, we grew the vendor direct program and added more than 1 million [stock-keeping units] and 1,000 new vendors. This drove a nearly 60 percent increase in vendor direct sales, which now comprise approximately 13 percent of digital sales for the Macy’s brand,” Gennette said.

Bloomingdale’s plays an important role in Macy’s portfolio because it gives the company a “meaningful” play in the luxury market, he noted. The business generates revenue more than $3 billion and will open its 35th store in Silicon Valley next month. Gennette said he would provide more details about the Bluemercury beauty business on a future call.

Earnings: Net income for the period dropped 54.1 percent to $340 million, or $1.09 a diluted share, from $740 million, or $2.37, in the year-ago quarter. On an adjusted basis, diluted earnings per share was $2.12.

Wall Street was expecting adjusted diluted earnings per share of $1.96 on revenues of $8.32 billion.

Macy’s reiterated prior annual guidance for 2020, which includes a net sales range of $23.6 billion to $23.9 billion and adjusted diluted EPS between $2.45 and $2.65. Comparable sales at stores owned and licensed were guided to a range of down 1.5 percent to down 2.5 percent.

CEO’s Take: “We have a clear perspective of where Macy’s Inc. and our brands–Macy’s, Bloomingdale’s and Bluemercury–fit into American retail today. We know 2020 will be a transition year as we make significant structural changes to the business. I am confident that the Polaris strategy we shared earlier this month will allow us to stabilize margins in 2020 and position the company for healthy growth,” Gennette said.