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The Last Thing Macy’s Needs Is a Trade War

Sarah Halzack
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The Last Thing Macy’s Needs Is a Trade War

(Bloomberg Opinion) -- Macy’s Inc.’s turnaround efforts didn’t backslide in the first quarter. The department store behemoth reported on Wednesday that comparable sales rose 0.6% from a year earlier in the first quarter, or 0.7% including licensed departments. That increase surpassed analysts’ expectations and set the retailer on track to easily achieve its full-year guidance of 0% to 1% growth on this measure.

Adjusted earnings per share of 44 cents also blew past analysts’ estimates. And while the company’s gross margin fell to 38.2% in the quarter from 39% a year ago, the company had previously warned this quarter would have particular gross-margin pressure, with improvement to come later in the year. 

But allow me to follow that admittedly faint praise with a warning: If this is all Macy’s was able to deliver before a significant escalation of U.S.-China trade tensions, just imagine how darkened the outlook could get if the standoff intensifies — both for Macy’s and its mall-based competitors — as the year goes on.

Macy’s, like other retailers, has been preparing for tariffs on a certain batch of goods to rise from 10 percent to 25 percent by taking steps such as reviewing sourcing alternatives. But President Donald Trump’s latest round of proposed levies — which would include clothing, jewelry, shoes and home goods coming into the U.S. from China — likely caught much of the industry off guard. Indeed, Macy’s executives said on a Wednesday conference call with investors that these most recent potential tariffs weren’t factored into its full-year guidance.

And it won’t be easy for any of them to immediately adapt. A coalition of industry trade groups says that 41% of the apparel imported to the U.S. in 2017 came from China, as well as 72% of footwear and 84% of travel goods. This underscores how vital that nation is to the global supply chain of these products.

Even if Macy’s and its competitors are successful in revamping their sourcing relatively quickly, we must consider that tariff hikes are bound to shake consumer spending patterns in ways that are hard to fully anticipate. Shoppers, in some cases, might trade down from luxe products to more basic ones. They might even skip certain discretionary purchases, such as dinner at a restaurant or a cute new dress for their vacation. That, in particular, is a threat to Macy’s, whose apparel-heavy business could be starved of shoppers.

Last year was a bit of a Goldilocks moment for the retail industry. The economy was strong and some of the e-commerce investments they had initiated two to five years ago were really starting to pay off. New levies on billions worth of goods threaten to sap that momentum. That’s especially true at a time when, as an unexpectedly weak Commerce Department retail sales report showed on Wednesday, there are signs the consumer picture is already less sunny.

Macy’s can and should continue to work on the things it can control. I was impressed by the April debut of Story, an ultra-Instagram-friendly shopping experience within Macy’s that has real potential to bring more traffic to its stores. At least in concept, its idea of focusing on gaining market share in so-called “destination businesses” like dresses and jewelry, seems worthwhile.

And it needs to demonstrate more clearly how certain elements of its turnaround plan won’t backfire. I worry its Backstage concept, an off-price area within Macy’s stores, isn’t ever going to be a powerful vehicle for bringing a new generation of shoppers to the Macy’s tent. And I worry that its Growth150 plan, which will bring remodels only to its top-performing stores, creates a confusing brand identity.

Macy’s shares have endured quite a roller-coaster ride in the last year. I thought the run-up they saw in the first part of 2018 after Macy’s upbeat 2017 holiday quarter was a bit overly optimistic. Macy’s had shown improvement, for sure, but a turnaround was hardly assured. Then shares were punished subsequently when the retailer’s quarterly results gave investors a reality check. The trade war could end up making this year a similarly volatile one for Macy’s shares.

I understand why investors are pleased with Macy’s progress, especially since expectations for apparel retailers were generally rather muted this quarter, thanks to everything from the timing of Easter to the weather. But geopolitics are at the doorstep of the mall, and investors shouldn’t discount how ugly that could get.

To contact the author of this story: Sarah Halzack at shalzack@bloomberg.net

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

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