Before its scheduled fourth quarter and full year 2022 in March, Macy’s issued an update on final-frame activity and provided additional insights during a conference hosted by advisory firm ICR Capital, which together provided a deeper dive into where the retailer’s business is headed in 2023 as it employs inventory controls, pricing measures and private label revisions in navigating a market pressured by changing consumer behavior and macroeconomic conditions.
The company provided the update as it prepared to present at the ICR Conference, which took place in Orlando from January 9 to 11.
Jeff Gennette, Macy’s chairman and CEO, said at the conference that, although macroeconomic factors will pressure consumers in 2023, the company’s application of pricing science and commitment to newness in driving the fashion component of its business would position it to make the most of market opportunities especially as shifts in customer buying patterns occur.
In the update, Macy’s addressed fiscal fourth-quarter sales and adjusted EPS guidance provided in its November 17, 2022 earnings call. Macy’s now anticipates net sales to come in at the low-end to the midpoint of the previously issued range of $8.16 billion to $8.4 billion and adjusted diluted earnings per share to fall in the previously issued $1.47 to $1.67 range. The company added that it expects total end-of-quarter inventories to come in at a level below last year’s and down mid-teens relative to 2019.
As part of the financial update, Jeff Gennette, Macy’s chairman and CEO, said Black Friday weekend sales were in line with the company’s expectations, while the week leading up to and following Christmas were ahead of plan. Still, sales lulls in the non-peak holiday weeks were deeper than Macy’s had foreseen. Occasion apparel was particularly strong as consumers were getting out and about, and preparing for New Year’s, and the abundance of weddings and related social occasions they looked forward to attending as the COVID-19 pandemic becomes a lesser issue. Gift merchandise sales met or exceeded expectations. Inventory composition and price points were in line with demand there, Gennette pointed out. However, the lulls were pronounced in what Macy’s calls self-purchasing categories including sportswear, casual apparel and some home categories.
The company’s more upscale Bloomingdale’s and Bluemercury banners enjoyed results stronger than anticipated and more robust than those at the Macy’s banner. Across nameplates, the company responded to the volatile marketplace by keeping close tabs on customer behavior and using data and analytics tools in response to demand shifts, which resulted in cleaner inventories and an expected gross margin rate approximately in line with Macy’s fourth-quarter guidance.
Gennette said Macy’s is acting on the assumption that consumers will remain financially pressured during 2023, especially in the first half, based on analysis of macroeconomic indicators and the company’s proprietary credit card data. As the holidays rolled through, the growth of credit card balances suggested less spending capability at least early in 2023. Macy’s has planned its inventory mix and depth of initial buys with those expectations in mind, he maintained, taking a balanced approach to merchandise receipts while retaining an ability to adjust as demand shifts in season, taking fashion and value into consideration. He asserted that efficiencies Macy’s has built into the business coupled with the company’s financial health, data-driven decision processes and agile operations should help it respond to opportunities that arise in an economy that is still in the process of emerging from the period dominated by the COVID-19 pandemic.
Newness Prevails
At the ICR conference, Genette said newness is critical in the environment today.
After retailers and vendors played it safe in the pandemic environment where comfort and hominess drove sales, consumers are shifting their purchasing focus not only to occasions but to what they need for return to work and socializing outside the home. Then, in the holidays, consumers were looking for gifts that reflected the less constrained environment.
“When you think about gifting, we had about 55% newness, which was up about 30 points from where we were in 2019,” he said.
Pricing is a critical issue. Inflation has created a more pronounced consumer price sensitivity in most cases, with the luxury sector perhaps something of an exception. Based in part on the strong holiday performances of Macy’s and upmarket Bloomingdale’s and Bluemercury banners, Gennette said that the luxury sector has demonstrated robust health and may retain more flexibility.
However, Gennette said that, in the holiday season, Macy’s maintained pricing discipline that helped avoid driving sales at all costs when they slowed.
“I think what’s important to point out is that when we saw this deeper lull, we did make the decision not to chase unprofitable sales,” he said.
The discipline to do so arose from a determination the company made in the period leading into the pandemic and executed against even as COVID-19 tumbled the marketplace.
“Clearly, when you think about what’s happened with Macy’s since the pandemic, we definitely have changed our buying patterns,” Gennette said. “We took the pandemic to basically solve what has been a historical pattern of buying into markdown allowances. We stopped that.”
During the holiday season, Macy’s buying approach allowed it to plan and take markdowns in a strategic way. The company applied data science to make targeted bets on what would drive sales most effectively without evaporating profits, he said.
Clearly, when you think about what’s happened with Macy’s since the pandemic, we definitely have changed our buying patterns. We took the pandemic to basically solve what has been a historical pattern of buying into markdown allowances. We stopped that.
– Jeff Gennette, Macy’s Chairman and CEO
Macy’s has taken its experience in the holiday season, the outlook it has gathered and the disciplined pricing approach developed into account in planning for the year ahead.
“When you think about how we’re looking at 2023, we’re going to be more conservative with our receipts, and we’re holding back a healthy open-to-buy reserve to be able to respond as the customer does by category in the season. While we’re taking a cautious view, we’ll be ready if the customer pivots,” Gennette said.
Still, the company will emphasize the newness message in 2023, with a fresh Macy’s banner marketing campaign dubbed Own Your Style launching in March, while it continues to stay on top of fashion trends across the organization. At the same time, Macy’s is incentivizing merchants and positioning the business to support the way it is conducting business today including more effective inventory management based on effective control and productivity.
The moves it has made give Macy’s the right footing to increase value and engagement through pricing science, personalization and the company’s loyalty program, Gennette said. Macy’s has become increasingly adept at pricing science but it only has begun the process of firmly establishing personalization in its scheme of things, he added. Then, Macy’s has continued a loyalty program expansion even as it has reached a point where 70% of the known customer base has signed on, up from about 50% at the beginning of the pandemic.
Gennette added that Macy’s is following those moves with customer-first initiatives that include a private label reinvent. Macy’s plans to either refresh existing own brands or develop new ones with an eye to customer life stage experiences, using its shopper understanding to advance private label operations in an initiative that will proceed over the next three years and drive sales while improving the cost of goods sold.
“You’re going to see our penetration of business in private brands go up,” he said. “You’re going to see the COGS improvement in that, the profitability opportunity that’s going to come from that. And a testament to that is what’s been happening with the INC brand, which is our number one women’s sportswear brand. That has been under development over the past year, and you really see it in the comps that we’re now getting. We’ll talk about that in detail during the fourth quarter call.”
Even as it works at the core of its business, Macy’s is extending the enterprise. Macy’s media network, in one example, is reaching “new customers, new brands with a new profit pool” expected to make a marked contribution to earnings, Gennette said. At the same time, he noted, the company is advancing the opportunity provided by Market by Macy’s that includes store sales but also the additional purchase generation created by interaction with digital operations.
“It’s our opportunity to bring a small format where we’ve got great customer signals,” Gennette said.
Omnichannel Considerations
Macy’s announced a few years ago that it would close a significant number of department stores but paused in the process when it found that a lack of brick-and-mortar operations in a given market had a negative impact on digital sales. Market by Macy’s is a format developed to profitably operate in places where a department wouldn’t suit while also supporting robust online sales.
Adrian Mitchell, Macy’s CFO, noted, “We’re excited about Market by Macy’s. Fundamentally, what Market by Macy’s allows us to do is to optimize the physical footprint to where the consumer traffic is. And we know that the consumer traffic is more towards off-mall than on-mall.”
He added that, although more pruning may be required, on-mall operations still are relevant, and Macy’s has discussed their relative strengths, including as support for digital sales, over the past few quarters. Still, off-mall is a key part of Macy’s go-forward strategy including Market by Macy’s.
“From an off-mall standpoint, we’ve really built the science that gives us much better confidence in the actual location of our Market by Macy’s. So we’ve already opened 10 and we will open more. But what we want to make sure that we’re doing is that we have the right level of sales per square foot productivity in those locations,” Mitchell said.
The strategy for Market by Macy’s includes in-fills for markets where the company already operates a department store and replacements, which it demonstrated by opening a Market by Macy’s location in Chesterfield, MO, the same day it closed a department store in the same St. Louis market, as well as areas where the company has no presence today.
A rendering of Bloomie’s concept stores
Even as it developed its Macy’s small store concept, the company has been expanding its recently developed Bloomie’s operation. On January 4, Macy’s announced that it would open the small-store variation on Bloomingdale’s in Seattle, in a first on the West Coast. Gennette said the Macy’s board is carefully monitoring Bloomie’s to understand how it can take a proper place in the company’s strategic plans even as it manages mall, off-mall and digital operations.
On a related subject, Gennette also characterized the development of Macy’s marketplace launch, announced in September of last year. as successful, having added 400 brands to the Macy’s partner portfolio. The brands involved have put Macy’s into tangential categories that wouldn’t have been insufficiently profitable for the company’s banners to carry. Even if to a limited extent, marketplace allowed Macy’s to engage profitably in electronics and gaming, categories where it would otherwise lack participation, in one example of its ability to generate non-core sales.
The Underpinnings
As he looked ahead, Gennette said the company’s current financial position gives it a solid basis on which to act in the year ahead and the ability to invest $3 billion in growth over the next three years, including the $1.2 billion projected for this year.
“I think when you look at the financial health of Macy’s, Inc. since the pandemic, and you look at where we are, certainly, we have improved substantially,” Gennette said. “We have no new term, near-term debt maturities and the debt maturities that we do have are unsecured. So that piece is really good. We also have several credit agencies that have recently given us upgrades. And our reduced leverage ratio gives us tremendous flexibility to respond to whatever is needed to drive more profitable growth.”
As it moves into the year ahead, said Mitchell, Macy’s has established a balance of inventory and reserves that it can tap as it encounters shifts in demand. The company has new reporting procedures and a cross-functional team of merchants, planners, finance staffers and supply chain professionals monitoring and also forecasting how the company will have to accommodate conditions one to two seasons out.
I think when you look at the financial health of Macy’s, Inc. since the pandemic, and you look at where we are, certainly, we have improved substantially. We have no new term, near-term debt maturities and the debt maturities that we do have are unsecured. So that piece is really good. We also have several credit agencies that have recently given us upgrades. And our reduced leverage ratio gives us tremendous flexibility to respond to whatever is needed to drive more profitable growth.
– Jeff Gennette, Macy’s Chairman and CEO
“But we’re pretty excited about the continued science that we’re doing in terms of inventory placement, understanding what’s selling, leaning into inventory productivity. But the discipline of inventory is critical from a liquidity standpoint, from a financial health standpoint, we’re going to continue to build those capabilities,” Mitchell said.
In a Morningstar Equity research note, analyst David Swartz said that Macy’s Polaris strategy including the use of private labels, online marketplace and new off-mall concepts, as well as its off-price Backstage operations, have helped stabilize the company against its competition. Still, Swartz noted, it remains vulnerable to e-commerce and fast fashion and while many of its online department stores are in top-tier malls, many are in less-attractive destinations. The store fleet does offer some liquidity advantages, but long term, the company needs to decide how it can best rationalize the store base.
To some extent, it is trying to do that, as the Chesterfield example suggests. However, Swartz notes that Macy’s is an aging retail concept trying to find ways to remain relevant in a quickly evolving marketplace. Even as it works to address online as well as off-price and fast fashion competition, the kinds of big-name clothing brands it has counted on to give it some distinction in the marketplace are going direct-to-consumer, which could become a formidable challenge down the line.
