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Despite Q4 Drop, Macy’s Stays Optimistic and Sees Heady Digital Gains

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Like never before, Macy’s Inc. is driving its digital business while reducing its store fleet and grappling with the pandemic and pronounced difficulties in apparel.

Macy’s predicts its e-commerce business will reach $10 billion in three years. It’s also generating greater income than brick-and-mortar.

“The profit contribution is better than stores,” Jeff Gennette, chairman and chief executive officer of Macy’s Inc., told WWD. “The profit rate in digital has been growing with the scale of the business.”

To further grow e-commerce this year, a website devoted to Bloomingdale’s off-price outlets is in the early stages of development, and macys.com is undergoing a major overhaul.

“You will start to see the website in its new skin in the fourth quarter,” Gennette said in an interview Tuesday morning, just after the retailer reported sharp declines in fourth-quarter sales and profits but indicated its overall performance beat expectations at all three brands — Macy’s, Bloomingdale’s and Bluemercury — and continued to show improvement from quarter to quarter last year marked by a return to profitability.

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The pandemic did take a steep toll on Macy’s Inc. in the fourth quarter. Net income fell to $160 million, or 51 cents per diluted share, from $340 million, or $1.09, in the year-ago period, as comparable sales declined 17.1 percent.

Adjusted earnings before interest, taxes, depreciation and amortization came to $789 million, versus $1.16 billion in the year-ago period. Operating income totaled $401 million last quarter, versus $559 million in the year-ago period.

Digital was a fourth-quarter highlight, as e-commerce grew 21 percent in the period ended Jan. 30, and represented 44 percent, or nearly $3 billion, of Macy’s total sales of $6.78 billion. About 25 percent of Macy’s digital sales were fulfilled from stores, including ship from store; buy online, pick up in store; curbside pickup, and same-day delivery.

“Performance was driven by the home, beauty, jewelry and watch categories, growth in digital sales and by acquiring new customers,” Gennette said. “Our investments in digital innovation continued to pay off in the quarter, with digital sales up 21 percent from 2019. We anticipate annual digital sales to reach $10 billion within the next three years, and that digital will become an even more profitable contributor to our business. Additionally, we exited the quarter with a lower cost base and a strong liquidity position, supported by a $3 billion asset-based lending facility that we have not drawn upon.”

For 2021, digital sales are projected to ease to 35 percent of net sales, as COVID-19 vaccinations accelerate and people feel safer returning to stores. Macy’s executives view 2021 as a year of “recovery and rebuilding” with continued pandemic-related challenges in the spring season and momentum building in the back half.

Macy’s long-term strategy for growth, known as the Polaris strategy, “was tested profoundly and proved durable and allowed us to adapt with agility,” Gennette said in his fourth-quarter conference call with analysts. Polaris has six “pillars,” or key initiatives: to deliver fashion and style for core and new customers, deliver clearer values through simpler pricing and promotions, excel in digital shopping, enhance store experiences, modernize the supply chain and transform through the right technologies and data.

Gennette said through Polaris, the company is “well positioned to adapt to customers’ needs and new forces in the external environment. We ended the year in a good cash position,” with $296 million in free cash flow.

“No one truly knows what the near- to midterm will look like, but we see post-pandemic momentum starting in the fall,” said Adrian Mitchell, Macy’s Inc.’s chief financial officer.

In early 2020, macys.com relocated from San Francisco to New York and a new macys.com team was formed, which Gennette credited as a major factor in last year’s digital growth.

As part of the macys.com overhaul, there will be enhancements to home pages and to such functions as search and checkout, Gennette said. He also said there will be better visuals to see how garments fit, livestreaming is being experimented with, and the company is striving to provide more accurate information on delivery dates. Gennette said the website will be “much more experiential, with a fullness of ability to tell brand stories.” It will also be layering in leased and luxury businesses like sunglasses and eyewear, he added.

A large proportion of Macy’s cap-ex has shifted to digital, though Gennette did not specify how much. Macy’s 2021 capex is set at $650 million.

Macy’s, the CEO emphasized, has been adapting its e-commerce for greater profitability in several ways: improving personalization, working to lower logistics costs such as by encouraging shoppers to use BOPIS and curbside services, and reducing split shipments so a customer could receive one package with a few items rather than a few different packages. The company is also working to better manage how it distributes inventory across fulfillment centers, stores and via vendor direct.

With both digital and brick-and-mortar, increased profitability is being sought by reducing “broad-based” discounting and promotions, and taking a more localized approach to those, Gennette added.

Macy’s entered e-commerce well before much of the competition and has consistently been one of the higher-rated websites. Yet the retailer has serious challenges ahead, including closing stores. Last year, 125 closings over a three-year period were revealed. The number can be adjusted. So far, nearly 60 units have been closed. At the end of the fourth quarter, there were 512 Macy’s stores and 53 Bloomingdale’s stores operating, including outlets. There were also 162 Bluemercury stores.

Macy’s also faces challenges with its apparel business, which was down 33 percent in volume last quarter. The average unit retail price on apparel was down 9 percent as a result of customers buying more casual goods, which are less expensive than work or special occasion attire.

“All of apparel remains challenged,” Gennette said during the call. Dress up categories “remain depressed, but inventories are in line with sales,” Gennette said.

He said he sees apparel in the first half of 2021 having a similar performance to the fourth quarter of 2020, while the back half of 2021 will see some improvement in apparel. “As people go into more occasion dressing, we will be ready with our wholesale partners,” said Gennette. “They do have inventory ready for us if we are ready to buy it.”

The picture was far brighter in housewares, tabletop, fine jewelry, sleepwear, fragrances and textiles. They all had double-digit sales gains last quarter.

Still, last year there was an issue getting enough furniture and mattresses from suppliers. “Demand is quite high. We have had issues of supply coming out of Vietnam and China. We expect that to be behind us by the end of the first quarter.”

To adapt to the health crisis and changing lifestyles, Macy’s recently introduced categories it never sold before, including outdoor recreation, at-home fitness and baby gear. “We added a lot of new content — 1,000 new vendors,” Gennette said.

Macy’s also needs to attract a greater number of shoppers under the age of 40, to lift its business. Gennette said there was progress on that front last year, thanks largely because of a revamp of its loyalty program with the addition of a bronze tier, the Klarna buy now, pay later payment platform which Macy’s has a financial stake in, and through the growing digital business.

Recent innovations at Macy’s, including the two smaller-store formats called Market by Macy’s and the upcoming Bloomies format, have been criticized by some retail experts as “distractions” drawing attention and resources from fixing the core business. Gennette disagreed, stating, “You have to do both in our business.”

He said not everybody is inclined to shop big suburban malls. “They like their local retail centers and lifestyle centers. If Macy’s is not in those zip codes, our business is going to be constrained. There are a lot of areas where we have geographic holes, where you don’t find our brick-and-mortar. We have to start to give shoppers a new node of transaction. You’ve got to look at the overall market, ecosystems and the lifetime value of the customer.”

Macy’s has begun creating retail “ecosystems” in the Dallas, Atlanta and Washington, D.C., metro areas involving opening or planning to open Market by Macy’s, which is a scaled-down version of Macy’s full-line department stores, as well as the Backstage and Bloomingdale’s the Outlet off-price formats, and Bloomies, the future small-format Bloomingdale’s. The idea is to fill-in markets where there are existing Macy’s department stores.

“We have made progress on the Polaris transformation strategy we introduced a year ago,” Gennette added. “We are accelerating several elements, including our focus on digital and omnichannel sales, improving customer value and building the infrastructure to support the growth of our business. We believe these actions will propel us to stronger performance in 2021 and beyond.”

Gennette characterized 2020 as “a year of unprecedented disruption,” adding, “We are incredibly proud of our team for their hard work to make our customers feel safe and comfortable when shopping with us. And we are grateful to our brand partners for navigating through the pandemic with us.”

For all of last year, Macy’s lost $3.94 billion, compared to a profit of $564 million in 2019. The company reported $3.58 billion in restructuring, impairment, stores closings and other costs. Sales totaled $17.34 billion in 2020, versus $24.56 billion in 2019.

For 2021, Macy’s anticipates between $19.75 billion and $20.75 billion in sales, adjusted diluted earnings per share of between 40 cents and 90 cents and asset sale gains between $60 million and $90 million.