Macy’s Inc. Posts Q2 Declines, Stays Cautious on Consumers
This story was updated on Aug. 22 at 4:13 p.m.
Macy’s Inc., after a tough quarter marked by slow consumer demand and steady clearances on excess spring inventory, anticipates better trends for holiday 2023 and a return to sales gains next year.
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“We have confidence in our strategy for holiday. We definitely see improvement ahead on the existing trend,” Macy’s Inc. chairman and chief executive officer Jeff Gennette told WWD, just after the company reported a second-quarter 8 percent sales drop to $5.13 billion from $5.6 billion in the year-ago quarter, and a net loss of $22 million, compared to a $275 million profit a year ago.
Gennette’s optimism wasn’t mirrored by Wall Street, however. Macy’s stock took a beating Tuesday, falling 14 percent, or $2.07, to $12.605, at the closing bell, with investors reacting to the results and the continued cautious outlook executives expressed for the remainder of 2023. For this year, net sales are seen reaching $22.8 billion to $23.2 billion, and down 7.5 percent to 6 percent on a comparable basis. That would be below 2019 (pre-pandemic) sales of $24.56 billion.
While not expecting sales growth to return this year, “We are committed to low, single-digit sales gains for 2024,” Gennette said during the interview.
Spelling out the upcoming holiday game plan, Gennette said Macy’s will be fueled by pumped up gift offerings in beauty; merchandising revolving around the 100th anniversary of Disney; the new Toys “R” Us in-store shops, which were rolled out last year through the entire chain, and the “On 34th” private brand collection, unveiled last month.
“There isn’t a piece in the collection that doesn’t work with something else on the line,” Gennette said. The women’s collection has more than 250-plus unique styles, designed to be mixed and matched and create more than 1,000 outfits, has inclusive sizing and targets ages 30 to 50.
He also cited cashmere, fine jewelry, and “nice trend changes” in housewares and textiles as expected outperformers for holiday. In beauty, gift offerings will represent 40 percent of the offering in the fourth quarter, from 30 percent the rest of the year, Gennette said.
In reaffirming the Macy’s outlook for the year, Gennette said the retailer maintains its “cautious” perspective on its shoppers. That’s different from others in the industry, such as the National Retail Federation, Walmart and the government, which see U.S. consumers as resilient in their shopping behavior due to wage increases, low unemployment and economists suggesting a soft landing for the economy. One difference is that Walmart sells a large amount of groceries, whereas Macy’s sells discretionary products.
“Our read on our consumer is accurate, for the 40 million customers we serve,” Gennette stated. “We don’t see any benefit with being any more optimistic on consumers.”
Gennette said consumers still have “good open-to-spend” but are being “quite choosy” when shopping, spending more on experiences, and will be impacted by student loan forgiveness ending in October.
In addition to customers pulling back on their discretionary spending, Macy’s Inc. was impacted by markdowns to clear spring merchandise and make room for fresh fall goods.
“Spring was effectively liquidated. We are in a great position with inventory control. There’s built in liquidity,” Gennette said, suggesting Macy’s can react quickly to emerging trends and chase orders. The CEO said promotional sell throughs were better than expected in the second quarter, clearance markdowns were not as big as anticipated, store floors and the websites are less cluttered and easier to navigate, and content is fresh.
The company was also impacted by growing delinquencies on credit card payments. Forty percent of Macy’s volume is generated through the retailer’s proprietary and co-branded cards. “Bad debt is picking up, but the portfolio is not unprofitable,” Gennette told WWD.
Though there were second-quarter top and bottom-line declines, Gennette said the results were better than expected. Top-performing categories were beauty, particularly fragrances and prestige cosmetics, women’s career sportswear and men’s tailored clothing. Gennette also saw improvements in textiles and housewares, while active casual and sleepwear remain challenged. To improve active, Nike men’s, women’s and kids is being reintroduced online and in 75 stores in October and in 200 stores by spring. Also, select Under Armour products will be sold at 150 stores and online beginning in February.
According to Macy’s chief financial officer and chief operating officer Adrian Mitchell, “Third-quarter sales are in line with expectations on reduced year-over-year promotions and clearance activity.”
The second-quarter loss included a non-cash settlement charge related to the transfer of pension obligations for certain retirees and beneficiaries. Earnings before interest, taxes, depreciation and amortization were $221 million in the latest quarter, compared to $614 million in the year-ago quarter.
Accompanying the second-quarter report was an announcement that four more small format Macy’s stores are opening this year, bringing the count to 12. The new units will simply be called Macy’s, while existing stores under the format continued to be called Market by Macy’s, though that could change in the future. There are also two scaled-down Bloomingdale’s stores, called Bloomie’s, in operation, with a third scheduled to open in Seattle in November.
The expansion signals that it’s so far, so good with the small store strategy, though too soon to green light an aggressive rollout.
“We got the right developers thinking about us and wanting us to move in,” Gennette said. “We think we’ve got the construction costs right, and the right layout but we still need to get the curation down in different parts of the country. We’re not declaring victory yet. We still have to get all the learnings right. Hopefully, this will be a scalable model in the future. We’re not doing this for kicks. We believe this is where the customer expects us to be.”
The four new Macy’s scaled-down units include one that opened last week in Highland Grove center in Highland, Indiana, and three others, in South Bay in Boston; Arroyo Market Square in Las Vegas, and Santee Trolly Square in San Diego, opening in the weeks ahead.
Macy’s small-format stores occupy 30,000 to 50,000 square feet in off-mall locations and offer men’s, women’s and kids fashion, beauty, luxury fragrances, gifts, toys, luggage, pop-ups, fashion “trend pavilions,” and such brands as Polo Ralph Lauren, Levi’s, Calvin Klein and private brands INC, Bar III, And Now This and On 34th.
“We continue to see uncertainty in the macroeconomic environment. We are leveraging our robust data science tools to refine inventory composition, while reading and reacting to shifting consumer preferences to meet demand,” Gennette said in his prepared statement Tuesday. “Looking ahead, we are committed to fortifying our core business and improving our customer experience while investing in our five growth vectors. We believe these advancements, enabled by our strong talent, will drive our relevancy and long-term success as a modern department store.”
Macy’s growth initiatives include growing and “reimagining” private brands; off-mall expansion via the Market by Macy’s, Bloomie’s and Bloomingdale’s outlet smaller formats; online marketplace expansion; luxury acceleration, and personalization initiatives in offerings and communications with customers.
Gennette will retire in February 2024 and will be succeeded by Macy’s Inc. president Tony Spring, the former CEO of Bloomingdale’s. The retailer is deep in a search process to hire a new Bloomingdale’s CEO.
By division:
Macy’s comparable sales were down 8.2 percent. Strength was seen in beauty, particularly fragrances and prestige cosmetics, women’s career sportswear, men’s tailored and off-price with Backstage, while active, casual and sleepwear remained challenged.
Bloomingdale’s comparable sales on an owned basis were down 2.6 percent. Bestselling categories were beauty, women’s contemporary and designer apparel, shoes and the outlet locations, while handbags, men’s and dresses were soft.
Bluemercury comparable sales were up 5.8 percent, with the business paced by skin care and color cosmetics.
By channel, brick-and-mortar sales decreased 8 percent versus the second quarter of 2022. Digital sales decreased 10 percent versus the second quarter of 2022. Comparable sales were down 7.3 percent, on an owned-plus-licensed basis.
The company also reported that inventories were down 10 percent year-over-year and down 18 percent to 2019, “reflecting ongoing disciplined inventory management and the clearance of excess spring seasonal product. The company continues to focus on ensuring that merchandise inventories are current, contain compelling product, and are at the appropriate receipt levels based on expected sales demand.”
Gross margin rate for the quarter was 38.1 percent, down from 38.9 percent in the second quarter of 2022.
Merchandise margin declined 130 basis points, due to heightened levels of clearance markdowns and promotions needed compared to the prior year to clear through spring seasonal product. Unfavorable category mix shifts and a shift in the timing of shortage recognition were partially offset by better inbound freight charges from the company’s costs savings efforts.
Gennette, during his conference call with analysts, opened his remarks by acknowledging the devastating wildfires on Maui, saying, “We have accounted for all our colleagues on the island, but a few have been directly impacted by the destruction and loss caused by the wildfires.” Macy’s is supporting relief efforts, raising donations and engaged with the American Red Cross.
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