2 Min Read |
Results were good, but its future hinges on an ambitious store initiative, and that’s still playing out.
Macy’s Inc. is heading into the holiday season with some spring its step. The department-store behemoth reported Wednesday that its comparable sales rose a better-than-expected 3.1 percent in the third quarter over a year earlier, or 3.3 percent including licensed departments.
Keep It Up
Macy’s has made progress after a long stretch of comparable sales declines. Like many of its retailing counterparts, Macy’s is benefiting from buoyant consumer confidence. But it has also helped itself with a slew of turnaround initiatives, including increasing its online assortment, adding off-price sections called Backstage to its department stores and expanding its Bluemercury beauty chain.
Despite handily beating analysts’ estimates on most key numbers, and raising its full-year earnings guidance, Macy’s shares didn’t move much in early trading. This demonstrates a dynamic I called out last month: Investors have exceedingly high expectations for retail right now after the industry’s surprisingly strong first half of the year. So impressing them is going to be tough. That’s especially true in Macy’s case, given that the stock has already gained more than 40 percent this year.
The reaction from Wall Street might also reflect that the real report card on durability of Macy’s turnaround isn’t what’s in this press release — it’s what’s happening in its stores right this moment.
Last year, the holiday season was a turning point for the retail stalwart, the period in which it finally snapped a multiyear streak of sinking comparable sales. During that time, its beauty business picked up, its inventory position got healthier, and it didn’t use profit-eating promotions as a crutch.
Last year’s third-quarter results, by contrast, were grisly for the department store chain. So it wasn’t exactly a feat of retailing excellence for the company to have improved on them in this year’s third quarter. I wouldn’t blame investors for holding the applause until after Santa’s shopping spree, when we’ll see whether Macy’s results look strong against more difficult comparisons.
To assess Macy’s longer-term future, we’ll need to keep a close eye on a new initiative that Macy’s CEO Jeff Gennette detailed for the first time this week in an interview with the Wall Street Journal. The retailer, he said, is experimenting with a store format that it’s calling “neighborhood stores,” which will have a smaller footprint, fewer employees, and narrower selection. Not all Macy’s locations will get this treatment; others that the company has dubbed “magnet stores” will get splashy renovations, including the integration of cutting-edge technology such as virtual reality headsets, and will be staffed with more workers.
Here’s where Macy’s executives and I agree: The storied department-store chain still has far too much square footage. I’m not sure, though, this is the right approach to tackling that problem.
Macy’s has shrunk its footprint in recent years, particularly after a 2016 announcement that it would close 100 stores. I worry that the bifurcation just muddies Macy’s brand identity: Is it an aspirational emporium where you paw at augmented reality-enabled tablets under glittery chandeliers? Or is it a no-frills, self-guided shopping destination that is Macy’s answer to off-pricers like TJX Cos.?
Macy’s executives also need to explain why they think chipping away at the size of some its stores is a more apt remedy to its problems than closing some of its weaker locations altogether. I’ve lauded the company before for being more proactive than some of its peers on pruning its store portfolio. But I still think its store count — which included more than 650 Macy’s locations at the end of the second quarter — is bloated for the digital era.
I know that Macy’s has to tread carefully in closing stores, as doing so can sometimes choke digital sales in that geographic area. And it’s true that rival Kohl’s Corp. has found some benefit in reducing the size of 500 of its stores, including improved inventory productivity. But, especially in the department-store business, I don’t think retailers can afford to simply nibble around the edges. They have to make major change. Now is as good a time as any for Macy’s to go even bolder.
Written by Sarah Halzack for Bloomberg