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Macy’s Takes a Shot at the Other Guys

At a time when retail is up to its eyeballs in ill-timed inventory, Macy’s Inc. is sitting pretty with stock up just 4 percent year on year and 12 percent below 2019, showing that healthy investments in inventory management and data science are paying off.

With Black Friday a week away, CEO Jeff Gennette says Macy’s is in a good position to serve holiday-prepping shoppers. “We are not saddled with older receipts and pandemic category overstocks across nameplates,” he told Wall Street analysts in a third-quarter earnings call Thursday, pointing to 55 percent seasonal newness, 30 percentage points higher than three years ago.

In a Nutshell: Macy’s said it “strategically brought in seasonal merchandise earlier to strengthen its competitive position for holiday and has the added capacity to chase in-season trends.”

Gennette said the retailer is leverage a modernized supply chain and pricing science tools to “yield higher turnover, gross margin return on investment and higher cash flow.”

The company has doubled down on strategic planning by season, quarter, category and brand, leaning on data science to understand where the consumer is shopping by both category and brand.

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Macy’s has spread its private brand manufacturing across more points of contact to reduce risk. It’s also flowing goods through additional ports to skirt congestion and deploying sophisticated forecasting and allocation tools for decision-making precision.

With traffic steady but conversion down, Macy’s digital trends suggest people are using e-commerce for discovery before making a trip to a physical store. The company is working to personalize its websites and use livestream shopping to engage consumers. Users of its mobile app, which drew 11 percent more active customers, “spend more per transaction and per year,” Gennette pointed out.

Though toys aren’t doing well at Target, it’s quite the opposite at Macy’s, Gennette said of the encouraging “initial response” to the permanent Toys “R” Us shop-in-shops installed at all of the department store’s locations last month next to the kids department. Most people purchasing at one of the Toys “R” Us installments are also “cross shopping” the rest of the store, he said of the 85 percent engaging in this behavior.

The recently launched Macy’s Digital Marketplace featuring new brands, products and categories from third party sellers offers a low-risk way to introduce new options without shouldering inventory liability, Gennette said.

The company plans to expand the nearly three-year-old, eight-location Market by Macy’s concept. “These off mall stores are 25,000 to 50,000 square feet compared to our full line average of roughly 185,000 square feet and offer a highly curated immersive shopping experience that celebrates discovery and convenience. Market by Macy’s conversion rates are generally higher than that of our full line stores,” Gennette said.

The company is considering new Market locations in areas where digital business is brisk but it doesn’t currently have a physical footprint.

Upscale Bloomingdale’s is also embracing the downsized off-mall format. A new 50,000-square-foot Chicago store replaced a 206,000-square-foot full-line location. The price Bluemercury beauty chain, which registered its fourth consecutive quarter of comparable sales growth, is also geared for growth.

Gennette noted a late October sales slowdown that spilled over into November. Colder weather is now reviving sales, especially in the outerwear, boots and similar temperature-driven categories. “We are evaluating the sustainability of recent trends and the drivers that we believe will impact holiday consumption,” he added.

Gennette is all too aware of the inflation-squeezed state of the consumer wallet.

“With that in mind, we believe they are waiting until closer to holiday to make purchases, especially if there is an extra day which is a Saturday, between Thanksgiving and Christmas,” he said. “We now expect holiday shopping patterns to be similar to 2019, and are taking the appropriate actions to support anticipated higher peaks around Black Friday, Cyber week, and the two weeks before Christmas.”

He went on to say that “it is too early to tell how much [shoppers] will allocate to our general categories.”

Strong vendor relationships and and attractive mix of private brand and licensed brands could help Macy’s adjust throughout the holiday season, Gennette said. “We can chase into areas of strength that are warranted and have a flexible pricing model to quickly adjust promotions and markdowns If demand does not materialize,” he added.

Chief financial officer Adrian Mitchell said the retailer is getting smarter about where demand is and how to better service it. The company converted space in 35 stores to serve as distribution centers, adding nearly 1 million square feet to its distribution network to reduce shipping costs and split shipments. Mitchell said the company is working to avoid taking excess inventory into 2023.

Macy’s expects to report in January that it’s closing less than 10 stores, he added.

Net Sales: For the three months ended Oct. 29, net sales fell 3.9 percent to $5.23 billion from $5.44 billion. Digital sales fell 9 percent from a year-ago, but were up 35 percent from 2019. Brick-and-mortar sales fell 1 percent from last year’s same quarter, and were down 9 percent versus the same 2019 quarter.

Macy’s said consolidated comparable sales fell 3.1 percent on an owned basis and were down 2.7 percent on an owned-plus-licensed basis. By nameplate, Macy’s comparable sales fell 4.4 percent on an owned basis and were down 4.0 percent on an owned-plus-licensed basis. The brand had 43.6 million active shoppers on a trailing 12-month basis, up 2 percent from the prior year. The quarter saw strength in occasion-based categories, including career and tailored sportswear, fragrances, shoes, dresses and luggage.

At Bloomingdale’s, comparable sales rose 5.3 percent on an owned basis and up 4.1 percent on an owned-plus-licensed basis. The brand saw 4.1 million active customers on a trialing 12-month basis, representing a 9 percent gain from a year ago. Sales were strong across women’s, men’s and kid’s contemporary apparel, women’s shoes and luggage. It’s Bluemercury brand posted comparable sales up 14.0 percent on an owned and owned-plus-licensed basis. About 650,000 active customers shopped the brand on a trailing 12-month basis.

Gross margin for the quarter was 38.7 percent, down from 41.0 percent a year ago. Merchandise margin decrease was driven by an increase in promotions and permanent markdowns at the Macy’s nameplate due to slower moving categories that include casual apparel, soft home and warmer weather seasonal goods.

For the nine months, net sales were up 2 percent to $16.18 billion from $15.79 billion.

Earnings: Net income declined 55 percent to $108 million, or 39 cents a diluted share, from $239 million, or 76 cents, in the year-ago quarter. On an adjusted basis, diluted earnings per share (EPS) was 52 cents.

Wall Street was expecting adjusted EPS of 19 cents on revenue of $5.2 billion.

For the fourth quarter, Macy’s is expected net sales of $8.16 billion to $8.4 billion, with adjusted diluted EPS at between $1.47 and $1.67.

The company reaffirmed its 2022 sales guidance for the year at $24.34 billion to $24.58 billion, and raised adjusted diluted EPS at between $4.07 to $4.27, up from the prior estimate in August of $4.00 to $4.20.

For the nine months, net income fell 3 percent to $668 million, or $2.37 a diluted share, from $687 million, or $2.17, in the year-ago period.

CEO’s Take: “The concept of a trusted one-stop shop is timeless. it works but only if it reflects the preferences and needs of our customer. And we have transformed our entire organization to do just that,” Gennette said, adding that Macy’s Inc. has a “breadth and diversity of product across multiple nameplates that are not tied to just one value, brand, category [or] user life stage.”