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Macy’s Attacks ‘Extreme’ Category Shifts with ‘Pricing Science’

Even though Macy’s Inc. didn’t expect the “extreme” category swings that defined first-quarter consumer spending, the department store company leaned on “pricing science” and a flexible assortment to follow shopper dollars wherever they wanted to go.

In a Nutshell: With some consumers adopting a hybrid work schedule and events back on social agendas, Macy’s “quickly pivoted to satisfy customers with what and where they want to shop,” CEO Jeff Gennette told Wall Street analysts on a conference call Thursday.

Shoppers broadly shied away from popular pandemic categories like soft home textiles and activewear that propped up spending during Covid’s early days.

“This shift accelerated faster than we expected,” Gennette said of the movement toward higher-margin categories such as dresses, women’s shoes, men’s clothing and home furnishings. “It contributed to an increase in store foot traffic as consumers are more likely to shop in person for occasion-based apparel.”

Overall, the retailer reported “about a 20-point down shift from the fourth quarter to the first quarter, and we didn’t anticipate it to be that extreme,” he said.

“I think that supply is out of whack with the demand and we’re using all of our pricing science to deal with it,” he continued.

A slight dip in digital sales reflected consumers’ return to patronizing brick and mortar. Macy’s reported a “higher-than-expected increase” in online returns concentrated in “accelerating categories” and adjusted its outlook in response, Gennette said.

Investments in personalization are beginning to bear fruit. “Today we’re starting to see the results of this personalization work with revenue driven by personalized product recommendations up 13 percent in the quarter,” he pointed out.

Macy’s is working to create a “private brand portfolio that is differentiated, defendable, and durable,” using “customer data and analytics to ensure that we have the right value equation and competitive pricing architecture,” he added. The company might build new brands or tweak existing ones.

The retailer will launch a third-party digital marketplace in the third quarter with categories like electronics and home & garden, while 37 new Backstage shop-in-shops are slated to open.

On the fashion side, shoppers will be able to use Macy’s new At Your Service centers to “shop full looks rather than just items.”

Macy's said consumers in Q1 returned to stores to buy dresses and occasion apparel, and less on active-casual and soft home.

Macy’s CEO Jeff Gennette said the retailer is reworking its private brand portfolio.

Like its peers, Macy’s is keeping a close watch on supply chain dynamics after it more product than originally anticipated when shipping bottlenecks briefly eased up.

“We were able to navigate these demand and supply trends, thanks to our underlying work to improve pricing science and our disciplined purchasing behavior, coupled with leaner inventories entering the year,” Gennette said.

China’s Covid containment measures and West Coast port labor negotiations are creating a “significant amount of uncertainty,” he added.

Though Macy’s has product on about 30 ships off the Port of Los Angeles—just one-quarter of the number once idled there—Gennette is bracing for a new backlog when restricted Asian ports begin shipping in earnest again. The company will “protect back-to-school” by tweaking Q2 and Q3 receipt lead times. First-quarter inventory was up 17 percent.

Net Sales: For the three months ended April 30, net sales rose 14 percent to $5.35 billion from $4.71 billion. Comparable sales rose 12.8 percent on an owned basis and up 12.4 percent on an owned-plus-licensed basis. Digital sales rose 2 percent and was 33 percent of net sales. Delivery expense as a percent of net sales declined by 50 basis points due to a decrease in digital volume.

By brand on an owned basis, Macy’s comparable sales increased 10.7 percent and Bloomingdale’s jumped 28.1 percent. At Bluemercury, comparable sales rose 25.2 percent.

Gross margin for the quarter was 39.6 percent, up from 38.6 percent in the year-ago period. Merchandise margin improvement was due to higher average unit retail driven by lower promotions on regular price merchandise, ticket price increases and category mix.

Earnings: Net income more than doubled to $286 million, or 98 cents a diluted share, from $103 million, or 32 cents, in the same year-ago period. On an adjusted basis, diluted earnings per share (EPS) was $1.08.

Wall Street was expecting adjusted diluted EPS of 82 cents on revenue of $5.33 billion.

Second quarter net sales were guided to between $5.5 billion and $5.6 billion, with adjusted EPS between 80 to 94 cents for the quarter, versus $1.29 in 2021, chief financial officer Adrian Mitchell said.

The retailer reaffirmed its annual 2022 sales guidance of $24.46 billion to $24.70 billion, and raised its adjusted diluted EPS guidance to the range of $4.53 to $4.95 from prior estimates of $4.13 to $4.52. The adjustment higher takes into account first-quarter results.

CEO’s Take:  Our strength is in our omni-channel ecosystem. We operate across the value spectrum from off price to luxury and have a balanced portfolio that can shift and flex with consumer demand,” Gennette said.

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