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Macy’s CEO Says ‘Grim’ Retail Reality Drives Sector’s Evolution

The state of retail and consumer spending might look “grim” for the moment, but Macy’s CEO Jeff Gennette is bullish on this deep downturn not dragging on forever.

In a fireside chat Tuesday with Cowen & Co. luxury and retail analyst Oliver Chen, Gennette said fashion will always remain a vehicle for self expression, which consumers will rediscover once the familiar rites and rituals of parties, picnics, graduations, dates and weddings begin to fill social calendars once again.

A return to normal can’t come quickly enough for Macy’s, which hours before the talk at Cowen’s 2020 New Retail Ecosystem CEO Summit reported a preliminary first-quarter loss of $652 million. Though the chain closed its doors in mid-March as the coronavirus outbreak blossomed into a full-blown pandemic, it has now reopened roughly 450 stores, with some only fulfilling orders for curbside pickup.

In her first gig as interim chief financial officer, Felicia Williams said Macy’s has been working to right-size its cost base in preparation for its smaller, leaner future. “The pandemic provides an opportunity to be even more aggressive than we had been,” she said, adding the company toiled to minimize its cash-burn rate. Though it took some inventory writedowns, mostly on fashion merchandise, those will be reflected in the second quarter.

Macy’s expects a “very gradual recovery,” Williams added, with gross margins slightly tougher in Q1 but improving in each subsequent quarter.” While the company has been modeling various scenarios, the business might not stabilize until well into 2022.

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Inventory receipts dipped in the first quarter, and Macy’s has the hard task ahead of stimulating demand by pulling all available marketing levers and rolling out enticing promotions. Second-quarter inventory will shrink significantly, Williams said, noting that Macy’s took its first markdowns in spring, although seasonal shorts and T-shirts have a longer life cycle and were less impacted. The retailer was much more aggressive with aged merchandise.

“We expect to head [into the third quarter with] clean inventories and with newness for our customers,” Williams said.

For Gennette, COVID-19 has yielded invaluable lessons that could influence Macy’s future. The CEO said he was surprised by “just how comfortable everybody is in running our business virtually.”

“For a guy who believed the team needed to be in the office, my perspective has changed,” Gennette said. While the retailer’s team is “doing more with less,” the company has yet to determine the appropriate balance of remote work versus on premise attendance “when we come back,” he added. The companies that strike the right balance, he said, will enhance their status as an employer of choice.

And if this budding movement toward flexible telecommuting arrangements takes hold, Macy’s will need to remix its merchandise to appeal to the work-from-home professional. It has already revisited its offerings via a ThredUp partnership, giving shoppers a taste of the fashion resale market, which Gennette insists is “not a fad” but rather a permanent shift in consumer preferences. Better-quality brands drive “really strong” sell-through when they surface in resale, he noted. Penny-pinching consumers, many of whom have recently been cast into the unemployment line, might have little choice but to scour the secondhand market for new-to-them fashion.

If nothing else, COVID-19 has spurred retail to adopt tactics and technologies the industry has been buzzing about for years, like same-day delivery, contactless transactions and instant returns credit. Plus, Gennette believes customers are likely to make curbside service a permanent part of their shopping habits.

For now, real estate remains a linchpin in Macy’s strategy—and drives its ability to attract much-needed funding and investments. The retailer monetized its “unencumbered” Herald Square flagship as part of its new $4.5 billion round of financing. Gennette said the iconic store will someday be redeveloped to include an office tower on the upper floors, a move that could attract jobs to its particular corner of Midtown Manhattan. He’s also keeping tabs on New York Governor Andrew Cuomo’s vision to revitalize the Pennsylvania Station transit hub a stone’s throw away, which would help to fine-tune Macy’s own timing.

According to Gennette, Macy’s is open to putting its other desirable real estate assets on the line to secure future bonds. “Where it makes sense to monetize, we will,” he said.

So far, that’s not in the cards—at least not for the foreseeable future.