Dive Brief:

• Macy’s, Inc. on Thursday reported first quarter total sales fell 7.4% to $5.3 billion, compared to year-ago Q1 sales of $5.8 billion, mostly due to the company’s many store closures — missing the FactSet analyst expectation for $5.5 billion, cited by Marketwatch. Q1 same-store sales on an owned basis fell 5.2% and fell 4.6% on an owned plus licensed basis, according to a company press release. Shares plummeted as much as 10% Thursday morning on the mismatch with analyst expectations.

• Stores closures are ongoing. The company received cash proceeds associated with real estate transactions of $96 million and booked $68 million of real estate gains. Of those, $47 million were related to the sale of the company’s Downtown Minneapolis property. Macy’s is under contract to sell two more floors of its downtown Seattle store, after selling floors five through eight two years ago; that transaction is expected to close in this coming fall, the company said. Macy’s also said that stores in Temple, TX and in Dublin, OH, will close.

• First quarter earnings of 23 cents per diluted share, or 24 cents per diluted share excluding premiums and fees associated with debt repurchases, were down from 37 cents per diluted share in the year-ago period, badly missing the adjusted earnings estimate from FactSet analysts for 36 cents per share, as cited by MarketWatch. 

Dive Insight:

In his statement Thursday, CEO Jeff Gennette took pains to note that the department store retailer’s results were in line with its own expectations, and that things are on track to meet its 2017 guidance. Pilot efforts in its women’s shoes, fine jewelry, and furniture and mattresses will soon yield results, and e-commerce sales growth is also encouraging, he said. 

The company affirmed its guidance for this fiscal year, expecting same-store sales on an owned basis to fall between 2.2% and 3.3%, and same-store sales on an owned plus licensed basis to fall between 2% and 3%. Total full-year sales are likely to decline between 3.2% and 4.3%, the company said.

“In 2017, we are focused on taking actions to stabilize our brick and mortar business, including the testing and iteration of additional pilot programs in order to bring them to scale in future years,” Gennette said. “At the same time, we will invest to aggressively grow our digital and mobile business, while continuing the integration of our online and offline experience to allow our customers to shop the way they live.”

But GlobalData Retail managing director Neil Saunders called the performance “gloomy” and noted that, considering last year’s “feeble numbers … the worsening … only adds to the sense that Macy's is on a slippery slope.” What bodes well, Saunders said, is that the company and its new CEO appear to have reckoned with the reality that “painful steps, like the shuttering of underperforming stores, are necessary for longer-term survival.” But Macy’s has retail fundamentals to address as well, he said.

“As prudent as the re-engineering of the store fleet is, Macy's main problems are centered on issues of product and store environment,” Saunders said in a note to Retail Dive. “On both fronts, there has been very little movement. Indeed, inventory levels this quarter were far too high, resulting in continued sharp levels of discounting and rather cluttered shop-floors. Against this backdrop, customer traffic and conversion rates continued to fall at pace.”

Saunders painted Macy’s move to fold its off-price Backstage effort into flagship stores as misguided, saying that GlobalData Retail research finds that strategy cannibalizes full-line sales. “As much as we can see the logic for this from the perspective of trying to make space more productive, we believe the strategy will ultimately fall short,” he said.“It also sends confusing messages to the customer about the Macy's brand. There is no doubt that Backstage is a good concept and one that Macy's should pursue, but we believe it is better suited to stand-alone locations in units where rents are cheaper.”

That strategy is closer to the off-price success experienced by Nordstrom, whose longstanding Nordstrom Rack stores are found shopping areas and in cities apart from its flagship fleet, though that retailer also experiences some sales leaks to its off-price operations.

Macy's problems, however, loom larger than that strategy alone. An over-arching question lingers about whether it's really up to its turnaround tasks, Saunders said. “Overall, our sense is that Macy's now has a much clearer sense of direction and it has a rudimentary road map to help it get to where it wants to go,” he said. “However, the distance it needs to travel over the next few years is enormous. We question whether the company is bold, nimble or healthy enough to cover such ground.”