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Macy’s CEO: Denim, Fragrances and Now Toys “R” Us Drive ‘Under-40 Strategy’

Macy’s Inc. new deal to revive the nostalgic Toys “R” Us brand inside Macy’s stores could “quintuple the size” of its toy business and keep a new influx of Gen Z and millennial shoppers loyal for life.

Macy’s Inc.’s Polaris strategy helped it best Wall Street’s second quarter estimates, while it also grows its pool of younger consumers.

In a Nutshell: Macy’s Inc. attracted 5 million new customers in the second quarter, CEO Jeff Gennette told Wall Street analysts Thursday, and about 40 percent of this mostly younger and more diverse group starts their journey on digital. As of now, they’re flocking to popular categories like denim and fragrances, he added, but the Macy’s brand is betting that a freshly inked Toys “R” Us deal with brand owner WHP Global might be the secret to keeping the “under-40” crowd loyal for life.

The way Gennette sees it, the toy category just could be what opens the door to get millennial parents shopping at Macy’s and discovering what else it has to offer. He believes the department store can “quintuple the sizes” of its currently “quite small” toys business, after this year’s mostly digital Toys “R” Us launch expands into 400 brick-and-mortars in 2022 with “full-out shops.” And the best part? Toys offer “pretty decent margins,” Gennette added.

But toys aren’t the only secret sauce to capturing and converting a younger cohort. Though it just launched last month, contemporary dual-gender private brand And Now This has already made a good impression on its target demographic, according to Gennette, who said Macy’s will continue evolving brand partnerships and investing in private labels.

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Strong demand fueled home goods in the quarter. Macy’s is poised to launch the private home textiles label Oake for socially conscious consumers in September, said Gennette, noting ongoing work on the company’s bedding and bath-towel-heavy Hotel Collection. And similar to the “Now Trending” section on the Macy’s website, which touts “the new stuff and latest obsessions you need,” Oake will live on a “sitelet” showcasing all of the retailer’s environmentally conscious products.

Gennette underscored the progress Macy’s has made under its Polaris transformation, as Q1 momentum leapt into Q2. “Our results this quarter demonstrate the power of an omnichannel model with a robust offering of categories brands and price points,” he said.

Retail isn’t either physical or digital, according to Gennette, but an efficient combination of both. “To me, it is clear that a comprehensive retail ecosystem with physical stores in the best malls, and the most productive mall locations, integrated with the best-in-class e-commerce operation is a powerful combination, and is moving us forward as a strong digitally-led omnichannel business,” he said.

With inflation shadowing the sector, Macy’s has been finetuning ticket prices in recent months. The company has secured additional inventory, while scaling back promotions. Some price increases haven’t even involved an actual raised ticket, but rather a reduction in POS discounting—the moment when customers, for example, apply their loyalty card discounts. Gennette said Macy’s is trying different strategies to see how customers respond.

Toys "R" Us is coming to 400 Macy's stores in 2021 and 2022.
Toys R Us mascot Geoffrey might soon be a common sight in Macy’s stores. AP Photo/Seth Wenig

Adrian Mitchell, chief financial officer, said getting inventory in better shape, playing with POS pricing in stores and launching location-level pricing initiatives have improved the retailer’s gross margins.

Net Sales: For the three months ended July 31, net sales rose 59 percent to $5.65 billion from $3.56 billion. Comparable sales at Macy’s were up 61.2 percent on an owned basis from a year ago and up 62.2 percent on an owned-plus-licensed basis, or up 5.8 percent and up 5.9 percent, respectively, when compared with the same pre-pandemic quarter in 2019.

Denim, dresses, occasion wear, men’s clothing and luggage performed well in the quarter. Macy’s believes the return of international travel could be a tailwind in 2022 and 2023.

Bloomingdale’s turned in a strong performance both online and in stores, with comparable sales on an owned-plus-licensed basis up 11.5 percent, with elevated designer products driving strength across all categories. Blue Mercury also improved over the first quarter.

Digital sales’ 6 percent fall from last year still marked a 45 percent improvement over the same 2019 quarter. Macy’s attributed the decline to consumers once again shopping in stores.

For the six months, net sales were up 57 percent to $10.36 billion from $6.58 billion.

Earnings: Net income was $345 million, or $1.08 a diluted share, against a net loss of $431 million, or $1.39, a year ago. On adjusted basis, diluted earnings per share (EPS) was $1.29.

Wall Street expected adjusted diluted EPS of 14 cents on revenue of $4.98 billion.

The company ended the second quarter with $2.1 billion in cash, which enabled Macy’s to reinstate quarterly dividends.

Macy’s raised full-year 2021 guidance and now expects net sales between $23.55 billion to $23.95 billion, up from prior guidance of $21.73 billion to $22.23 billion. The retailer also guided adjusted diluted EPS at $3.41 to $3.75, up from $1.71 to $2.12.

For the back half, the retailer expects net sales ranging from $5.04 billion to $5.19 billion, on adjusted diluted EPS between 17 cents to 26 cents.

“There are still headwinds, we continue to face the supply chain constraints, the tight labor markets, elevated levels of holiday shipping surcharges and potential unforeseen impacts of the Covid variance. And so we’ve built our expectations for these headwinds into the low end of our guidance, which still doesn’t contemplate a return to government mandated shutdowns should they prove necessary,” Mitchell said.

For the six months, net income was $448 million, or $1.41 a diluted share, against a net loss of $4.01 billion, or $12.91, in the year-ago period.

CEO’s Take: “We have a strong first half of the year as we executed our Polaris strategy while operating in a better environment. We have come through what I hope will be the worst of the pandemic and emerged even more focused, more determined and more strongly positioned to succeed in the future,” Gennette said during the call. “Our results are clear, the pillar strategy is working, not only to improve the fundamentals of our business and our balance sheet, but also to build a bolder brighter and stronger Macy’s for the future.”