If Macy’s is going to get back on solid footing the time would be now. Its next big debt maturity – US$3bil – doesn’t come until 2027, giving the company some breathing room to improve sales growth and margins. — AP
MACY’S Inc stock has fallen about 38% this year and is poised to close at its lowest level since January 2021 after reporting yet another slowdown in sales growth on Tuesday.
But rather than punish one of the United States’ oldest and best-known retailers, there are plenty of reasons investors might want to give the company another chance – albeit with a caveat.
Although Macy’s posted a net loss in the second quarter, store sales fell less than forecast.
And the company has made headway in clearing out a bloated inventory, watching it fall 10% from a year earlier and plunge 18% from 2019.
Although that entailed offering big discounts on seasonal summer goods, which eroded profit margins, it made way for new merchandise that should help bolster margins with Tony Spring, the head of its reinvigorated Bloomingdale’s unit, set to take over as the company’s chief executive officer in a matter of months. For years, Macy’s saw its margins suffer at the hands of broad promotions and unprofitable stores.
But a new pricing strategy, inventory management and pivot to smaller format stores are offering encouraging signs for future growth, Goldman Sachs analyst Brooke Roach wrote in a research note earlier this month.
Roach rates the shares a “buy,” with a 12-month price target of US$23, or double where they currently trade, according to data compiled by Bloomberg.
Under Macy’s new pricing and promotional strategy, the depth of discounts are determined by style, whether it’s available in-store or online and specific store location. The new approach also determines how quickly those goods sell out and how much inventory is available.
Along with that, Macy’s has also been closing unprofitable department stores and opening smaller ones called Market by Macy’s that are not within an indoor shopping mall.
When combined, the two strategies allow Macy’s to avoid losing unnecessary margin to discounting and earns it more sales per square foot of real estate.
The company believes it can reach low single-digit sales growth beginning next year by cutting US$200mil in costs and refraining from haphazard discounting.
There’s also reason for optimism when it comes to Macy’s recently launched private-label clothing collection called On 34th, which features sizes between XXS and 4X.
The collection includes more than 250 styles designed to be worn in any season, which might reduce seasonal discounting. Its next private brand launch is expected in Spring 2024.
Not to be overlooked, Macy’s has also taken measures to consolidate its suppliers and source higher quality fabrics in the new collection to generate fatter margins. Macy’s has seen success with the relaunch of its private label brand INC, which could make up a third of an estimated US$900mil private label business by 2026, according to Bloomberg Intelligence analyst Mary Ross Gilbert. Both of these new and refreshed collections could set it up to perform better than last year during the fall and holiday season.
If Macy’s is going to get back on solid footing the time would be now. Its next big debt maturity – US$3bil – doesn’t come until 2027, giving the company some breathing room to improve sales growth and margins. Working in its favour is a strong cash position relative to some peers.
Macy’s listed US$438mil in cash this quarter, compared with US$286mil at Kohl’s Corp recorded last quarter.
All this marks a strong setup for Spring, who takes over in February after being credited for reinvigorating Bloomingdale’s contemporary apparel and accessories departments and elevating the luxury shopping experience both in store and online.
Until then, current CEO Jeff Gennette can work on fine tuning the current strategy. By modernising its brands, expanding its stores away from malls and growing its online marketplace, Macy’s could finally make a real comeback.
To be sure, the challenges are stiff. Macy’s warned investors that consumers are being picky about spending on nice-to-have goods. The company’s revenue from its credit-card business declined US$84mil from a year earlier to US$120mil, representing 2.3% of net sales compared with 3.6% back then.
The drop is the result of debts it could not collect and rising delinquencies – a sign that consumers are coming under increasing pressure, chief operating officer Adrian Mitchell said on a conference call to discuss the results.
About 50% of Macy’s customers earn US$75,000 or less and are likely to feel squeezed even more when student loan repayments start up again soon, Spring said on the same call.
So, even with solid inventory levels and personalised discounts, the company has a tough task ahead to muster up demand amid a tougher consumer spending environment.
Although Macy’s may not return to the aspirational middle-class department store it once was, there are signs that it may be on a turnaround to something new – and more sustainable. — Bloomberg
Leticia Miranda is a Bloomberg Opinioncolumnist. The views expressed here are the writer’s own.
