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Macy’s Revamps Polaris Plan as Q1 Sales Take 45% Tumble

Macy’s is revamping its Polaris strategy for a post-COVID world and doesn’t expect sales to stabilize until next year—or “even 2022.”

The department store company started the quarter on solid ground in February before the coronavirus pandemic forced stores to close in mid-March, CEO Jeff Gennette said Thursday in a fireside chat with J.P. Morgan analyst Matthew Boss, and joined by outgoing chief financial officer Paula Price, after the retailer reported preliminary first-quarter results. Digital sales began trending upward in conjunction with the brick-and-mortar pause and “we continue to see the strong digital performance in May,” he added, with e-commerce sales “up 80 percent.”

Macy’s has been encouraged to see that digital sales haven’t slowed down in zip codes where stores have reopened. COVID-19, Gennette said, seems to have accelerated “the customer behavior shift largely underway” and “the digital business will become increasingly important,” with online expected to drive a larger slice of sales and revenue.

Macy’s early investments in digital and mobile have paid off in this crisis, he said, adding that stores have been instrumental in fulfilling online orders. To date, 190 stores have reopened and another 80 will reopen Friday, bringing the total count to 270 stores open for the Memorial Day weekend. Additional stores are operating for curbside delivery only.

Going forward, Gennette said the retailer’s loyalty program will become increasingly critical to building customer lifetime value, and Macy’s will accelerate personalization and adjust product assortment to meet customer expectations. That will mean a greater focus on fewer brands.

Current trends and Polaris

Given that Macy’s formulated the Polaris plan prior to the pandemic’s outsize disruption in retail, the retailer is giving its strategy a rethink. It’s now in the process of examining every aspect of Polaris to determine where to accelerate, where to adjust and where to pause as its settles into the new post-COVID normal. The chain will go all in on digital, in light of recent trends and expected behavioral shifts, while planned investments in its “best stores,” on the other hand, will be on the backburner for now. But Macy’s will double down on boosting off-mall profitability, in addition to right-sizing the organization and expense base.

As he’s previously said, Gennette stressed that Macy’s will need to shrink in order to grow. A laser focus on cost reduction will help the company retire $1 billion in debt that’s coming due in the next two years.

Meanwhile, Price said Macy’s is reviewing options to raise capital that covers more than just the amount it needs to stabilize the business and sales, which she believes won’t reach normalized trajectories until 2021 or 2022. Macy’s, she said, is modeling a number of scenarios to project liquidity needs and monitoring sales trends for stores that have reopened to forecast its future revenue base.

However, Macy’s is “reevaluating” previously announced store closings, suggesting that in a post-COVID-19 that the company isn’t ruling out shutting down more locations beyond the 125 closures announced in February. That will depend on projected sales and how the company evaluates a store’s four-wall profitability before deciding if it pays to open a certain locations. Macy’s plans to have inventory levels aligned by the end of the second quarter in July so it can start the third quarter with fresh inventory receipts in time for back-to-school, Price added.

Quarantined consumers have responded to different categories while in their homebound confines. Home products continued to strengthen in April, as did beauty and the active apparel categories, Gennette said.

“The strength remains in beauty, activewear, sleepwear, fine jewelry, as has fashion jewelry. Kids remain strong,” he said. The apparel business was soft, but better in men’s than women’s and the company is seeing the same trends whether at Macy’s or the higher end Bloomingdale’s nameplate.

“Since reopening stores, the mix has gone back to the usual pattern. Steady performance in accessories and beauty. Seasonal categories have come on strong—swim, sandals, tees,” he said, as women’s ready-to-wear in sportswear, particularly in dresses and suits, remains challenged, both online and in reopened stores.

Gennette expects all stores to be reopened by the middle of June, presuming current virus patterns hold. “We’re watching how governors are responding,” he said, Macy’s is in discussions to open the Herald Square flagship in Manhattan for curbside delivery.

“As stores open, we are learning everyday. We are watching [consumer trends] to validate third and fourth quarter sales plans,” Gennette said, noting that there are four possible scenarios and which one makes the most sense will be determined by how the customer responds as stores reopen.

When asked by Boss about “irrational promotional activity” by competitors, Gennette said so far he hasn’t seen any, but said that Macy’s–like its competitors–will go deeper on merchandise reductions where needed to clear out some excess inventory that have a limited shelf life. The company, which is balancing how to buy conservatively while chasing trends, is working with its vendor partners to assess fall plans. He expects home will play a bigger role in sale as holiday approaches and families get together again, new categories could include home office and a bigger focus on wellness. Macy’s is also looking to expand in the packaged food category, particularly in family-sized pantry items.

Gennette said he’s keeping tabs on why competitors are closing stores and making sure “we have different strategies.” But rivals shutting down stores could unlock new talent or create opportunities to work with new brands that he said may very well end in a Chapter 13 or 11 bankruptcy. There’s $10 billion worth of opportunity,” whether that’s looking at new categories or working with partners to ultimately provide what “we think our customer wants,” he said

First-quarter preliminary results

The department store retailer on Thursday said it expects first quarter sales to be down 45.5 percent, mostly due to the store closures that began on March 18 due to the coronavirus outbreak. Macy’s provided preliminary estimates on select financial data, including a first quarter sales range between $3.00 billion to $3.03 billion, compared with net sales of $5.50 billion in the year-ago period. The preliminary estimate was below what Wall Street analysts were expecting. Their consensus estimate before Macy’s preliminary report called for an adjusted diluted net loss per share of $1.22 on revenue of $3.29 billion. The operating loss was projected to be between $905 million to $1.11 billion, compared with operating income of $203 million a year ago. The company said it has $1.52 billion cash and cash equivalents on hand, and total debt of $5.66 billion. That’s compared with $737 million in cash and $4.72 billion of debt a year ago.

The retailer began reopening stores on May 4, and so far has about 190 Macy’s and Bloomingdale’s stores open in their full formats. Another 80 doors will reopen for the long Memorial Day Weekend. For the stores have reopened, enhanced health and safety standards are in all the stores and facilities, and Macy’s is also offering curbside pickup in many of its locations, including at some stores that remain closed to the public. Freestanding Blue Mercury stores are beginning to offer curbside delivery at some locations.

Macy’s said its teams in digital and supply chain met during the week of March 23  and a week later decided to test curbside pickup as a pilot, launching in three stores the week of April 6. That expanded to 17 stores and then 98 locations. Nine weeks after that first cross-departmental meeting, the curbside pickup service has now been ramped up to 300 Macy’s stores.

“Looking back, our performance in February was solid and in line with our expectations, but we saw a precipitous decline in sales with the closure in March. As a developed omnichannel retailer, we experienced a steady uptick in our digital business in April, which was encouraging, but only partially offset the loss of sales from the stores. The digital performance was driven by strong execution and enhanced fulfillment options, including curbside pickup where allowed,” Gennette said in a statement. “With two weeks of results from reopened stores, customer demand is moderately higher than we anticipated…. We are closely watching consumer behavior as we reopen more stores, and we remain flexible as we navigate this crisis. We expect business to recover gradually.

Macy’s will report first-quarter results on June 9.

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