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Macy’s CEO Says Risks ‘Too High’ With Saks-Style Split

Macy’s Inc. CEO Jeff Gennette addressed why the retail giant will not be following in Saks’ closely watched footsteps as the company reported a strong fourth quarter ahead of Wall Street estimates.

In a Nutshell: Gennette told Wall Street analysts in a conference call Tuesday that the Macy’s board ultimately put the kibosh on the question of separating stores and e-commerce after a “comprehensive review.”

His comments come after activist hedge fund Jana Partners recently reduced its stake in the company, reversing course on the shares it amassed last summer before urging a Saks-style split when word of Macy’s $10 billion digital potential first aired earlier in the year. Industry insiders panned the idea of a Macy’s clicks-vs-bricks divorce as “operationally difficult” for a business of its sheer size and scale.

“In every scenario we considered, we found that the combination of our profitable digital platform with our national footprint will deliver greater value to shareholders, than a separation of our digital and physical assets” for all of the brands under Macy’s Inc., Gennette said. He went on to say that an “integrated omnichannel Macy’s Inc. with multiple nameplates from off price to luxury continues to be the most appealing to our diverse and multi-generational customer base.”

Gennette said the review left no stone unturned, and examined revenue growth drivers, the need for a third-party investment, what a financial partner might require and the economics of monitoring a digital standalone’s performance. What’s more, a separation would harm Bloomingdale’s, a beneficiary of its parent’s extensive reach.

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“Also, another important consideration was our view with the damage to gross margin for the digital and store businesses, due to the potential transfer costs, and markdown liability,” Gennette said. “We also found that in every alternative scenario we considered, the execution risk for the business and our customers was too high.”

The company is busy standing up new initiatives like a partnership with jewelry expert Pandora that will expand five pilots into 28 new locations this year. It also leveraged a budding tie-up with Toys “R” Us to double its toys business last year with “more aggressive growth” ahead, Gennette said, en route to 400 of the toy giant’s shop-in-shops in store this year in a bid for Gen Z and millennial shoppers.

Bloomingdale’s and Bluemercury, the beauty outlet, are also working on similar initiatives. The former aims to build on its recent success with its holiday carousel collection with culinary personality Giada De Laurentiis with theme focusing next month on the second season of the Netflix hit series “Bridgerton.”

Gennette said the company opened three smaller-format Market by Macy’s stores last year and will open more, as well as Bloomingdales off-mall stores, in August. Some are in locations where an existing Macy’s door is set to close. The locations were announced in 2019 and the retailer is waiting to scale up its off-mall stores and have them open to transition customers. Gennette said the doors closing down are cash-flow positive, and currently serve as fulfillment hubs for online pickup, curbside pickup and same-day deliver services.

He added that repositioning the Macy’s brand next month will help differentiate it in cluttered marketplace. “This brand transformation is a key step within our Polaris strategy to win with fashion and style,” Gennette said.

Supply-chain investments have created an “agile, data driven and increasingly automated” network,” he noted. “We’ve seen the results of this work payoff throughout 2021 from increased speed of delivery to operational efficiency into better inventory utilization.”

Net Sales:  Net sales for the fourth quarter ended Jan. 29 rose 28 percent to $8.67 billion from $6.78 billion, and 4 percent from 2019’s $8.34 billion. Comparable sales for company-owned stores plus licensed rose 27.8 percent from a year ago.

“Total company [average unit retail] was up 11.5 percent for the fourth quarter and for the full year was up over 11 percent,” Gennette said. “The growth of our digital business continued in 2021. Sales remained strong and we saw healthy levels of conversion for at 4.2 percent, a 13 percent increase compared to 2019.”

For now, apparel categories are “still down, but they’re getting better and casual and athleisure was always good,” Gennette pointed out. “The dress categories are picking up, so we expect that’s going to be the momentum going forward.” Though Macy’s had over-indexed on occasion-based fashion in 2019, “disciplined purchasing behavior” has a more curated merchandise assortment, he added.

For the full year, net sales jumped 41 percent to $24.46 billion from $17.35 billion, essentially flat from 2019’s $24.56 billion. Comparable sales for company-owned stores plus licensed rose 42.9 percent from a year ago.

Earnings: Net income for the quarter more than quadrupled to $742 million, or $2.45 a diluted share, from $160 million, or 80 cents, a year ago. Compared with 2019 figures, net income more than doubled from $340 million, or $2.12 a diluted share.

Wall Street expected adjusted diluted earnings per share (EPS) of $1.99 on revenue of $8.47 billion.

For 2022, the retailer guided forecasts for the year to include net sales between $24.46 billion and $24.70 billion, and adjusted diluted EPS at between $4.13 to $4.52, citing macro-environment challenges from inflation, supply chain pressures, labor shortages and potential Covid-19 variants.

For the year, net income was $1.43 billion, or $5.31 a diluted share, against a net loss of $3.94 billion, or $2.21, a year ago. When compared with 2019, net income rose nearly three-fold from $564 million, or $2.91 a diluted share.

CEO’s Take: “We are well positioned to compete successfully and profitably in today’s market,” Gennette said. “We operate one of retail’s largest e-commerce businesses integrated with a nationwide footprint of stores and fulfillment centers. We are confident in our path forward as one integrated company continuing to execute our Polaris strategy in the accelerated initiatives we shared today, allowing us to unlock additional value, acquire new customers and grow market share.”