There are several reasons why I believe that department stores like Macy’s are here to stay. Macy’s is a distinguished household name and, while it is in a transition period, it is going to be an aggressive retailer in the years to come. It will have to change, and at the Investors meeting on February 5, 2020 Macy’s CEO Jeff Gennette promised major changes.
This report examines the opportunities this retailer has in a competitive environment that has changed dramatically. First, let me enumerate what I believe department stores stand for. These key principles are solid building blocks on which any store can operate, and Macy’s leads.
1. Department stores have a leadership position in providing family dressing – i.e., a whole family can shop in the store and find fashion for everyone.
2. Department stores provide fashion coordination and generally teach customers what fashion is at the moment. Their awareness of color has helped many shoppers put together a wardrobe that works every season.
3. Department stores are generally located in convenient locations. They are easily accessible in center-city or in dominant shopping malls.
4. Department stores have shown leadership in innovative ideas beyond their core fashion focus and have sold products such as computers, sporting goods, or even books when the demand was strong.
5. Department stores have introduced new fashion trends, new products and new fashions to the frequent shopper.
6. Department stores have learned to be lean and clean at the end of a season and have adhered to a strict seasonal calendar to offer customers fresh merchandise.
I believe that Macy’s stuck to these principles over the years, as have Nordstrom, Dillard’s, The Bay, and Belk’s. At a higher price point-level, Neiman Marcus and Saks Fifth Avenue did the same. However, in recent years Macy’s has become very promotional in order to maintain their sales momentum across all their stores.
Previous managements had ambitions to become a national company. That motivated management to purchase the May Department Store Company with a slew of weak store locations. While the acquisition boosted sales, it destroyed the image of the company. Darrell Rigby of Bain warned in early 2000 that stores should localize to better match the needs of individual communities. Some markets have subtly different needs such as preferences for fashion versus basics and addressing that is key to maintaining happy customers.
But, Macy’s management wanted to operate as a national company, with the sad result that some stores were a drag on sales and earnings. In response, over the last three years the company closed about 100 stores. Analysts and pundits were pushing for the company to close even more – several hundred stores. At the meeting last Tuesday, management announced the closing of another 125 stores, of which 29 will be closed this year.
At the meeting, Jeff Genette outlined a new three-year plan called Polaris. (Polaris is North Star in Latin, and North Star was the title of the first three-year plan Jeff Gennette outlined at a meeting when he took over the leadership of Macy’s). Last week, the headlines screamed that 125 stores would be closed and 2,000 jobs would be eliminated. We assume the stores were either unproductive or in weak locations, and the 2,000 jobs were irrelevant. It is 9% of the workforce and, sad as it is to see associates lose their jobs, a necessary move. There was also a lot of talk of consolidation into new campuses, including a corporate centralization into New York City from the dual seats of Cincinnati (the former home of Federated Department Stores) and New York City (the home of Macy’s). In addition, the e-commerce center will move from San Francisco to Atlanta, and other physical consolidations will further centralize the company more in New York City and the East.
Among the five actions that will be taken to implement the Polaris program, I think the organizational changes were disappointing. While Macy’s is a $24 Billion enterprise, management still has not learned from companies like TJX or Costco that a smaller executive organization could run the company successfully. While there were some major shifts of responsibility, it seems to me that the executive floor (13th floor in the Herald Square building) still has too many executives saluting each other.
The company has in the past developed fabulous private label brands. I am thinking about labels like I.N.C. and Alfani which have multi-billion-dollar annual sales volume. So, it is not a surprise that management wants to develop four new brands that will resonate with customers and have similar billion-dollar sales potential. Customers will be pleased with new brands providing they are fashion- right and value priced.
Here are the five Polaris action points.
1. Strengthen Customer Relationships. This involves an expanded (better?) loyalty program that can build a more profitable customer lifetime value.
2. Curate Quality Fashion. Be the ‘best’ brand destination and balance sales and margins. This means a return to those core strategies of the past. It runs counter to the present high volume of sales promotions which obliterate everything in the fashion departments.
3. Accelerate digital growth. Management hopes to enhance the digital experience, grow the omni-channel customer base, and improve profitability.
4. Optimize Store Portfolio. Invest in best stores, expand off-mall profitability, and test market new ecosystems. Consumers directly will be served from some warehouse locations.
5. Reset Cost Base. Right-size the organization and expense base, balance sales and profit, and improve productivity of working capital. Management indicated that 2020 is a year of transition, and the improvements will come during the next three years.
So, Macy’s will close 125 stores with a drop of sales of about $1.8 Billion. The company will expand this year in the off-price channel with 7 Backstage free-standing stores and 50 stores within Macy stores. It will, in three years, create annual savings of $1.5 Billion. Management expects to have $500 Million in savings in the current year. There will be, however, $450- $490 Million in charges against 2019 earnings (to be announced February 25, 2020).
I estimate that the company is closing another 21% of stores in the next three year. Management indicated that it will close 29 to 30 units in fiscal 2020 and the additional 100+ stores in the following two years. That bold move is unilaterally important. It is sad that management only dismisses 2,000 associates – 9% of the work force. If that is the case, we consider it poor planning and think it sets unrealistic expectations.
The company shared sales projections for the next three years. For 2019, they expect sales of $24.5 Billion with fully diluted earnings of $2.57 to $2.77. For fiscal 2020, sales are projected at $23.6 – $23.9 Billion. Fully diluted earnings are seen at $2.45 to $2.65. Net sales for fiscal 2022 (the end of the three-year Polaris plan) are projected at $23.2 -$23.9 Billion.
I think it will be difficult to achieve these results since the selling costs and general management costs will exceed expectations. I expect sales to drop more than management hopes and projects, and I am looking for more realistic planning of the company’s future. I was part of Macy’s executive staff many years ago. It is a fine company with great tradition. Management must give all of us a realistic appraisal. Building new towers in San Francisco and New York is disruptive to customer traffic. Using Latin slogans is not a motivator when the life of a beloved institution is at stake.