Dive Brief:
- Macy’s on Thursday reported that third quarter net sales fell to $5.17 billion from $5.4 billion in the year-ago quarter. E-commerce failed to reach previous double-digit growth, hurt by work on the company's website, the late arrival of cold weather and higher-than-expected delivery costs, executives said on a call with analysts.
- Comparable sales on an owned plus licensed basis fell 3.5%, according to a company press release. Stores in lower-tier malls were a 30 basis point drag on comps, CEO Jeff Gennette said in a conference call Thursday morning, also telling analysts that such locations are undergoing a close review. That evaluation will be done by the end of the year and the results presented at the company's investor day in February, Gennette said.
- Net income in the quarter tumbled to $2 million from $62 million a year ago, the company also said. Macy’s lowered its guidance in several metrics, saying it now expects comps to be down 1% to 1.5% (from its previous guidance for flat to up 1%) and net sales to be down 2% to 2.5% (from its previous expectation for flat growth).
Dive Insight:
Macy's was buffeted on all sides in the third-quarter, with e-commerce growth ebbing and its stores in lesser malls under-performing significantly.
Executives repeatedly expressed confidence in their "store segmentation strategy," which entails three individual approaches to growth: one for about 10 flagships (including its iconic Herald Square store in New York), another for 150 growth stores (about half its business) and the third for its hundreds of "neighborhood" stores. They also said that the Backstage off-price effort is now at scale and "continues to exceed expectations, very much driven by locations open for more than a year up mid single digits."
That focus on flagships and growth stores has led to neglect elsewhere, according to GlobalData Retail Managing Director Neil Saunders. "Outside of the stores Macy’s has tried to improve, there are a host of other shops that remain plain dismal, down-at-heel and uninspiring," he said in emailed comments. "They are hard to navigate and do not meet the needs of the modern consumer in terms of the services or offer they present. It is those stores, some of which are in failing malls but others of which are in relatively successful locations, that are dragging Macy’s down. Even a few simple cosmetic changes would help, but Macy’s seems to be inert when it comes to doing anything about reviving its estate."
Most of the retailer's neighborhood stores are found in B, C and D malls, the lesser of which are emptying as they lose anchors and customers, according to Nick Egelanian, president of retail real estate development firm SiteWorks. Gennette said the department store will access the "inventory, profitability and sustainability of those locations" in lower-tier malls, with an understanding of their impact on their communities and their contribution to digital sales.
The company will be investing in stores where malls are also investing, Macy's President Hal Lawton said, adding that the company has been "watching the trend across our malls for quite some time. We did see a steeper decline in those doors than we anticipated."
Macy's, which expanded drastically early in the century, undertook a significant pullback of that footprint in recent years when it closed 100 stores. Last year a Macy's spokesperson insisted that was the end of the company's physical contraction. But some analysts, including Egelanian, believe it has further to go.
For one thing, struggling malls are accelerating their declines, and that's adding to "bifurcation" of the industry, according to research from Retail Metrics emailed to Retail Dive. Projected third quarter earnings growth for off-mall chains "are significantly higher at +7%" than the 17% decline at mall-based stores, Retail Metrics said.
"Whether they were hinting at store closings or not (and I think they were), they MUST close these underperforming stores that are on an irreversible downward slide," Egelanian told Retail Dive in an email. "As I have been saying for many years, Macy’s needs to slim down by at least 2/3 of its store fleet sooner or later, with the bulk of what must close being located in secondary malls and geographically in the middle of the country."
Two of the prongs in Macy's growth strategy seem to be on track; the third appears to be due for a reckoning. "Their future, if they can muster the ability to execute, is as a fashion and experience oriented chain oriented to A Malls and City Centers on the coasts where Macy’s and Bloomingdales have had long standing brand recognition and support," Egelanian said.
