Macy's doubles down on stores with 'Growth 50' strategy

Dive Brief:

Macy's CEO Jeff Gennette on Tuesday outlined "Growth 50," a new plan to bring experiments from its Woodbridge Township, NJ store into 50 stores nationwide, according to a Seeking Alpha transcript of the company's earnings call. The plan includes: an expansion of Backstage and Big Ticket; more fashion and localized product; improved fixtures and facilities; expanded in-store technology, top talent, localized marketing and community engagement; and a focus on leased business like food and beverage.
Off-price unit Backstage is poised for a major expansion this year, with another 100 stores, including locations in premium malls. Private-label apparel is now about 20% of the business, and Gennette said that will grow to be between 29% to 40%.
Macy’s is also continuing to sell off parts of its real estate. The company has an agreement with a private real estate fund sponsored by Brookfield Asset Management to sell the upper seven floors of the State Street store in Chicago for a total of $30 million, which includes a $3 million contribution toward redevelopment costs. Details are still being worked out for similar plans in San Francisco’s Union Square, according to CFO Karen Hoguet.

Dive Insight:

Macy’s is beginning to sound like a department with its worst days behind it, and Gennette on Tuesday sounded upbeat about the future as the company beat fourth quarter expectations. "Macy's recipe for success is a healthy brick-and-mortar business, combined with robust growth in digital," Gennette told analysts, according to Seeking Alpha’s transcript.

Analysts expressed confidence in Growth 50’s potential. "We believe Growth 50 is the laboratory which can drive the success or failure of Macy’s in the long-term because we see this as the ‘Research and Development’ program which may or may not attract younger customers," according to a note from Cowen & Co. emailed to Retail Dive. "Macy’s needs to retain existing customers but attract new ones too and ideally lower its average and median customer age over time."

But it's early days, Cowen warned. "Macy’s is in early innings of an essential reinvention: proprietary product, intensification of product curation, non-tender loyalty and customer lifetime value analysis, increased speed & inventory open to buy — these are all important & integrated efforts which require ‘steroids’ to compete effectively in the battle vs. new and existing competition including Amazon."

GlobalData Retail Managing Director Neil Saunders echoed such sentiments in an email to Retail Dive and cautioned "realism about Macy's situation and the context of the latest numbers." Macy's growth of 1.3% is well below overall retail spending growth of 3.9% over the same period, he noted. "So, Macy's has lost ground both at an overall level and, by our calculations, within a number of key categories like apparel and home," he said. "This view is backed by our consumer data, which shows no real recovery for Macy's in terms of shopper share or shopper opinion about its proposition."

But executives sound prepared to address that, with changes across the board in merchandising, pricing, marketing and the many physical stores that have escaped the cutting board. The retailer plans less overlap in promotions, which started last year.

The turnaround is also expensive — capital expenditures are slated to be $1 billion per year on an ongoing basis, plus another $50 million this year related to work on its Union Square and State Street deals, Hoguet said, although she stressed that the company will also use its excess cash to reduce debt in 2018 and remains committed to keeping its leverage ratio in the targeted range.

The company’s real estate continues to yield cash. In San Francisco, a deal yet to be finalized will have the retailer separate the company’s 243,000 square foot "I. Magnin" store from its Union Square flagship, trimming the overall store area to about 700,000 square feet, Hoguet said.