But revitalizing will not be easy. Store experience needs complete overhaul.
By Neil Saunders
Macy’s has heralded its third quarter figures as a sign that the company is getting back on track, noting that the sales performance beats that posted over the first half of the year. While the statement is technically correct, we think it is largely a case of wishful thinking and unfair comparisons. In truth, the first half was dragged down by a terrible first quarter when sales tumbled by levels not seen in over a year; this provides for an extremely soft comparison. Moreover, sales performance has actually worsened since the prior quarter at both the total and comparable levels. As such, if anything these figures show a company grappling with what looks like terminal decline.
Its inability to get the retail side of its business to work is one of the reasons Macy’s is looking to monetize its assets. The partnership with Brookfield Asset Management will help. Macy’s does have a strong asset base which can yield significant capital, some of which will be used to invest and develop locations it sees as having future potential.
Our view is solidified by the continued erosion in profitability, where net income fell by 87%; this follows a 46% decline over the same period last year. This is the seventh consecutive quarter in which sales and profits have both declined. It is a telling fact that this quarter Macy’s made just 0.2 cents for every dollar it took in revenue. This is a weak position that, given the general direction, puts the company on a pathway to long-term unprofitability.
Its inability to get the retail side of its business to work is one of the reasons Macy’s is looking to monetize its assets. The partnership with Brookfield Asset Management, which was announced this morning, will help with — this as will the ongoing sale of underperforming stores. In our view this route is prudent, not least because Macy’s does have a strong asset base which can yield significant capital — as the sale of the Union Square, San Francisco store for $250m has proved.
We are encouraged by the fact that Macy’s will use some of the capital to invest and develop locations it sees as having future potential. This is unlike the position of Sears which has used asset monetization to fund the day to day operations of the business, something that in our view suggests a company circling the drain. As such, Macy’s short term future is secure, while over the medium to longer term it has the scope and funds to engineer a turnaround.
Revitalizing the business will not be easy. It needs to completely overhaul the experience to make stores easier to shop, more interesting to browse, and more relevant to today’s shopper. It also needs to develop a much more fulsome exclusive or own label offer to differentiate it from rivals.
That said, revitalizing the business will not be easy. Shopping trends are firmly against Macy’s; and its brand, while not completely diminished, is most certainly tarnished. In our view, it needs to completely overhaul the experience to make stores easier to shop, more interesting to browse, and more relevant to today’s shopper. It also needs to develop a much more fulsome exclusive or own label offer to differentiate it from rivals. We have seen some signs of this activity in its partnership with Brookstone, which will bring a range of exclusive gifts to stores this holiday season.
Looking ahead to the holidays, we see some upside for Macy’s, if only because of soft comparatives as a result of last year’s very weak trading, high discounting, and excess inventory. This should allow Macy’s to pull out a much better performance this year, potentially breaking the trend of long-term profit and sales declines.
Neil Saunders is CEO of research firm Conlumino.