Macy’s Inc. did better than expected in the second quarter, and plans to lean into luxury to take advantage of consumers shifting their spend from travel and tourism to quality and costly home textiles.
In a Nutshell: Macy’s will continue to take a conservative approach for the back half of the year, and has continued to update its Polaris strategy as it monitors customer needs with an eye to top- and bottom-line growth.
“Macy’s, Inc. performance for the quarter was stronger than anticipated across all three brands: Macy’s, Bloomingdale’s and Bluemercury, driven largely by the sales recovery of our stores. Restarting our stores’ business was our top priority, and we successfully accomplished that while also ensuring that our digital business remained strong. Going into this crisis, we had a well-developed digital business and we’re seeing that thrive as we attract new and welcome existing customers back to our brands,” Jeff Gennette, chairman and CEO, said.
In a conference call to Wall Street analysts, Gennette said the company saw 3.8 million new customers to the Macy’s brand, reflecting a “more diverse and much younger” group than its current base. “We’re all over that to make sure the first purchase leads to a second purchase,” he said, adding that the goal is to convert them to omnichannel customers transacting through digital, full-price stores and outlets. The Macy’s brand alone has more than 40 million customers, he added..
“Our immediate priority is to control what we can control,” Gennette said, noting that while there is still uncertainty, the team in the last several months has learned how to operate in the current environment.
“The holidays is where Macy’s shines,” Gennette said of the back half of 2020, “and this holiday will be no exception.” Newness in the assortment represents in the 50 percent range for holiday, with gifts under $15 all the way to luxury price points, he noted, and the company will be expanding fulfillment options so “customers can better manage the trade-off between costs and convenience.” The retailer is also focused on providing more shipping options and better clarity on delivery dates, and figuring out how to disperse expected bottlenecks at its stores, possibly by carving out separate areas for returns and pickups.
One of the advantages of being a department store is access to brands and the “ability to pivot to changing customer needs,” such as home, casual apparel and bath and beauty, Gennette said. Sales in men’s tailored clothing and women’s dresses, as well as luggage, deteriorated in line with office closures and sagging tourism, but Gennette expects dresses will come back, with casual styles already picking up. He couldn’t predict the future for men’s tailored clothing given the continuing uncertainty around when workers will return to offices. Within home, spending has shifted to bedding, housewares and textiles.
“One of the surprises has been the strength of luxury, [which] we’ve seen at Bloomingdale’s and in the luxury categories in Macy’s,” Gennette said, citing luxury mattresses above certain prices, fragrances and diamonds. “We’re reacting to all of that,” he said, emphasizing that the merchandise mix has been evolving based on customer behavior.
Macy’s fine-tuned Polaris strategy focuses on forging “strong profitable lifetime relationships” with customers, Gennette said. The company’s supply-chain redesign has emphasized capacity planning and centralized fulfillment.
The retailer will open several off-mall Macy’s and Bloomingdale’s locations, starting first with stores in the Dallas, Atlanta and Washington, D.C., markets. The company is also planning several Backstage stores, and will trial an off-price e-commerce component next year. “Every off-mall [store] will have full service for returns and pickups,” Gennette said. Also, a Bloomingdale’s small-store format concept will be tested in the fourth quarter of 2021.
As for merchandise mix, the retailer said it continues to curate quality fashion, in both national and private brands from off-price to luxury. The retailer will maximize the return-to-home trend, and highlight Bloomingdale’s status as a destination for textiles from private brands to luxury offerings.
Improving the digital experience will be key to growing the channel’s sales, including more personalized engagement with the customer base. Also ahead are plans to deliver an intuitive product discovery experience online, and a user-friendly mobile app for the Macy’s and Bloomingdale’s brands.
Gennette expects holiday promotions and deals will give customers the option to purchase well ahead of time, and have gifts shipped in time for celebrations to account for possible delays.
Net Sales: For the three months ended Aug. 1, net sales fell 35.8 percent to $3.56 billion from $5.55 billion. Comparable sales were down 34.7 percent at owned stores. The retailer said it saw a faster store recovery than originally modeled and better-than-expected growth in digital.
Store sales fell 61 percent versus last year, the company said. Digital sales grew 53 percent over the year-ago quarter, and accounted for 54 percent of comparable sales at owned stores. Gross margin in the quarter was 23.6 percent, or 650 basis point better from the first quarter due to improved retail margins from assortment mix and better sell through of clearance merchandise.
The retailer said inventory was down 29 percent from a year ago. That allowed the company to exit the second quarter in a clean inventory position.
“We entered Q3 with clean inventory and an appropriate sales to stock ratio,” interim chief financial officer Felicia Williams said during the conference call. “Sales at Bloomingdale’s outpaced expectations,” she added, with the top-performing home category propping up challenged sales in men’s and women’s apparel.
Macy’s Inc. has achieved $16 million in real estate asset sales, and expects to recognize a total in the $50 million range for the year, Williams said. The company ended the quarter with $1.4 billion in cash and $3 billion of untapped capacity under its new asset-based credit facility.
Williams said stores are still ramping up and that the company continues to model various scenarios for the back half of the year, like fresh Covid-19 flareups and slow tourism activity. While the supply chain has opened up, the retailer is seeing “bottlenecks” at ports, she said. Looking ahead, digital sales are expected to grow in the third quarter, while higher shipping costs are expected in the fourth quarter. The retailer continues to work with its vendor partners to make sure it has the inventory receipts it needs for the back half.
For the six months, net sales fell 40.5 percent to $6.58 billion from $11.05 billion.
Earnings: The net loss was $431 million, or $1.39 a diluted share, against net income of $86 million, or 28 cents, in the year-ago quarter. On an adjusted basis, the diluted loss per share was 81 cents.
Wall Street was expecting an adjusted diluted loss per share of $1.77 on revenue of $3.47 billion.
For the six months, the net loss was $4.01 billion, or $12.91 a diluted share, against net income of $223 million, or 71 cents, in the same year-ago first half.
CEO’s Take: “We are encouraged by our second quarter performance; however, we continue to approach the back half of the year conservatively. Our immediate priority is successfully executing Holiday 2020. We are also focused on laying the groundwork for 2021 and beyond. We plan to invest in fashion, digital and omnichannel, work with agility, and galvanize the resources of the company to serve our customers and move the Macy’s, Inc. business forward,” Gennette said.