Macy’s flagship store at 151 West 34th Street in Herald Square in New York City.
Photograph Courtesy of Macy's

The department store chain reported another poor quarter. Will Macy's growth initiatives be enough to offset the decline?

By Phil Wahba
August 12, 2015

Macy’s M keeps skidding.

The department store chain on Wednesday reported its second quarter in a row of declining sales, and blamed everything from a drop in international tourism to shifting consumer spending priorities to a corporate re-organization earlier in the year that continues to distract executives.

Macy’s, which also owns the upscale Bloomingdale’s stores, said comparable sales fell 2.1% in the three months ended August 1- while Wall Street analysts were expecting them to rise 0.4%. And its profit fell 26% to $217 million. The poor showing led the retail to lower its full year forecast halfway into 2015, and now Macy’s expects total sales to slip 1% for the year, rather than increase by that amount.

It’s unusual to see Macy’s on the ropes. Coming out of the recession, it deftly outmaneuvered competitors like J.C. Penney JCP and Kohl’s KSS of years, thanks to earlier investments in e-commerce and those stores’ merchandising missteps. It also benefited from have a more middle-class customer, less squeezed by the poor economy.

But more recently, Macy’s has been struggling to keep that edge: in a symbolic turn of events, TJX Cos, TJX the owner of T.J. Maxx and Marshalls which has been siphoning business from department stores for years, finally surpassed Macy’s in size in 2014. And despite Macy’s digital muscle, analysts still expect Amazon.com to surpass it in 2017 as the #1 seller of apparel in the U.S.

Let’s have a closer look at what ails Macy’s, and at the steps it’s taking to get back on track.

1) Shift in consumer spending away from categories like apparel and home furnishings to travel, entertainment and electronics:

Chief Financial Officer Karen Hoguet said Macy’s again struggled with these consumer spending patterns last quarter, a big problem for a retailer that gets virtually all its business in those categories. Of course that doesn’t explain why Macy’s fell short of expectations, given that it has been calling out these trends for a few quarters now.

“We see opportunities for generating more sales from our customers,” Hoguet told analysts on a conference call. “It is clearly getting harder. As I said, there’s a lot of competition for the dollar in categories other than what we sell.”

2) A drop in international tourism:

Macy’s gets about 5% of its revenue from international tourism, or $1.5 billion a year. The Manhattan flagships (including Bloomingdale’s) and stores in San Francisco and Chicago are a big draw for international tourists. Hoguet said that drop in tourism lowered its comparable sales by a percentage point. She shouldn’t expect any relief anytime soon between the weak euro and the Chinese yuan, which has been devalued for two days in row. That is especially true of Bloomingdale’s, which felt the pain of fewer tourists last quarter than Macy’s did.

3) Increasing competition:

Kohl’s and Penney are back on the upswing (we’ll know more this week whether that has continued, when both retailers reported their second-quarter earnings), and T.J. Maxx continues to grow, squeezing Macy’s in its traditional department store business.

Both Kohl’s and Penney have made huge strides in integrating their stores and e-commerce, narrowing their tech gap with Macy’s. What’s more, both Kohl’s and Penney have been upgrading their own stores brands, which generate half of sales and also are exclusive to them, meaning they have more pricing power and are an attraction when those items are a hit with shoppers. Macy’s gets about 25% of its sales from house brands.

4) Sluggish economy:

Unemployment might be a multi-year lows and the economy humming along, but that’s still not translating into robust business for Macy’s, or retailers in general. Last month, the National Retail Federation lowered its 2015 retail spending forecast.

 

So how is Macy’s responding?

1) Expanding outside the United States

Unlike Penney, Kohl’s or Sears, Macy’s has a cachet abroad, and it will try to see if that can translate into a sales bonanza when it opens its first international store in 2018 in the UAE. Macy’s on Wednesday also announced the creation of China Limited, a joint venture with Chinese retailer Fung Retailing Limited to launch an online flagship store on Alibaba’s online shopping mall for brands, Tmall Global. This will be Macy’s second attempt at e-commerce in China.

2) Taking on T.J. Maxx head-on

Next month, Macy’s will open the first of its Backstage outlet/discount stores that are squarely aimed at winning back customers that have defected to rivals like T.J. Maxx, but also to keep pace with competitors like Nordstrom which are aggressively opening their own discount chains.

Macy’s CEO Terry Lundgren admitted in June that he was opposed for years to the retailer taking the off-price plunge, and it remains to be seen whether the market needs a new entrant, even one with Macy’s pedigree.

3) Beefing up its e-commerce

Looking to remain an e-commerce leader, Macy’s is testing out same-day delivery in more cities now and keeps pushing its other tech initiatives like smart fitting rooms.

4) Expanding its Bluemercury beauty retail chain

Macy’s keep expanding the Bluemercury chain of beauty stores it bought last year, with a view to bringing in new products to its stores (and compete with Penney’s Sephora stores, along with Kohl’s improved beauty sections) but also benefiting from that brand’s popularity. It is adding 10 locations and will reach 76 in all by year-end.

5) Raising money from its real estate

Macy’s is under a ton of pressure from activist shareholders to raise billions of dollars from its real estate, including its iconic Manhattan store. While the company is studying it seriously, it did announce plans to sell its downtown Brooklyn store to real estate developer Tishman Speyer, but lease back a few floors.

With Macy’s core department store business in a long slump, it remains to be seen how much longer the retailer can resist investor entreaties to get cash from more such assets.

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