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Trouble for Department Stores as Macy’s Says Consumers Don’t Want Price Increases

Macy’s Inc. reported a second-quarter miss on earnings Wednesday, and the company’s chief executive officer, Jeff Gennette, indicated that consumers aren’t willing to pay for any price increases—whatever the cause.

That doesn’t bode well for retailers, particularly the troubled department store sector, as many search for ways to mitigate the next onslaught of tariffs.

In a Nutshell: Gennette told analysts the company did test price increases for furniture and housewares, categories impacted when President Trump raised the tariff rate to 25 percent from 10 percent in May for Tranche 3 imports from China.

“We know from the earlier tranche of tariffs, though, that today’s customer doesn’t have much appetite for price increases,” Gennette said, adding that “we are looking at no price increases on any content that is touched by Tranche 4.” That’s provided the planned tariff hike for either Sept. 1 or Dec. 15 remains at 10 percent.

“I think on a long-term basis, we believe that we will work through solutions on 10 percent. We are working closely with our manufacturing partners. We are leveraging our scale and strong relationships with our sourcing partners, as well as our vendor partners, who source out of China. So I think that 10 percent in manageable…I think when it goes to 25 percent, you with a whole other series of dynamics that I would not say we wouldn’t have to raise prices,” Gennette said.

Some of those tariffs were slated to go into effect on Sept. 1, but are now delayed until Dec. 15 “to benefit Christmas shopping,” Trump said. And while Trump might have wanted to look like Santa Claus to retailers and consumers, Sourcing Journal found that most apparel and footwear items are still targeted for a tariff hike on Sept. 1, followed by a smaller group that will see increases come Dec. 15.

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The company is also partnership with fashion resale marketplace ThredUp, with a pilot program set for 40 stores across the country. “We know many consumers are passionate about sustainable fashion and shopping resale. This partnership gives us the opportunity to reach a new customer and keep them coming back to shop an ever-changing selection of styles and brands that we don’t typically carry,” Gennette said.

And its Bloomingdale’s operation will launch a subscription rental service next month called My List. Macy’s is partnering with Caastle for its rental service. “Learnings from Bloomingdale’s will inform the development of a similar rental service at Macy’s in the near future,” Gennette said.

Net Sales: For the three months ended Aug. 3, net sales slipped nearly 0.5 percent to $5.55 billion from $5.57 billion.

Gennette said rising inventory levels were a challenge for the quarter, mostly due to a fashion miss in its women’s sportswear private brands, slow sell-through of warm weather apparel and an accelerated decline in international tourism.

Comparable sales growth for company owned stores rose 0.2 percent.

Earnings: The company reported net income of $86 million, or 28 cents a diluted share, a 48.2 percent drop from year ago net income of $166 million, or 53 cents.

Wall Street was expecting 45 cents on sales of $5.55 billion.

The retailer reaffirmed its annual sales guidance for 2019, which it expects to be flat year-over-year. It did lower its second-quarter adjusted diluted earnings per share range to between $2.85 to $3.05, from its earlier range of $3.05 to $3.25.

CEO’s Take: “We took markdowns to clear the excess Spring inventory and are entering the Fall season with the right inventory to meet anticipated customer demand,” Gennette said. He noted that the firm’s Destination Businesses did well, while its digital business posted its 40 consecutive quarter of double-digit growth.

“Our 2019 strategic initiatives are on track to contribute to sales growth in the back half of the year, and we have plans to drive productivity and improve gross margins,” the CEO said. “Our team has responded quickly to the external environment, course corrected when needed and we remain confident.”

The Destination Businesses include dresses, fine jewelry, big ticket, men’s tailored, women’s shoes and beauty.