U.S. Markets open in 1 hr 3 mins

Can Macy's Weather a Market Downturn?

Daniel B. Kline, The Motley Fool

Macy's (NYSE: M) has turned a corner. The company, which has struggled in the face of the so-called "retail apocalypse," found its footing in the most-recent quarter.

The retail chain, which has closed underperforming locations, reported first-quarter earnings of $0.45 per diluted share, up from $0.26 in the same period a year ago. Perhaps more importantly, the company saw same-store sales increase by 3.9% compared to Q1 2017 on an owned basis, and 4.2% on an owned plus licensed basis.

"The winning formula for Macy's, Inc. is a healthy brick & mortar business, robust e-commerce and a great mobile experience," said CEO Jeff Gennette in the company's first-quarter earnings release. "While we have more work to do, the continuing improvement in our stores is encouraging and we once again achieved double-digit growth in the digital business. Our best customer is responding well to the improvements we've made to her experience in our stores, on .com and through the Macy's app."

The exterior of a Macy's store

Macy's has worked on enhancing its omnichannel capabilities. Image source: Macy's.

Where is Macy's now?

Give Gennette credit for stopping the bleeding and putting some initiatives in place that have performed well. In addition to strengthening its portfolio of Macy's and Bloomingdale's stores, the company has also built out its omnichannel capacity, including the ability to fulfill digital orders from more than 500 stores. In addition, the company has been adding the ability to buy online and pick up in a store to all of its locations.

Omnichannel operations will give Macy's additional protection against digital rivals. The company has also created Macy's Backstage and The Outlet, outlet/discount stores for its two brands. This gives the company a way to reach customers who might otherwise not shop at its regular stores.

The company also purchased Bluemercury, a beauty and spa brand. That expands the company's reach with younger customers and broadens its audience.

Macy's is moving forward

Macy's has stabilized its store base, largely moving out of lower-tier malls and shopping centers. Its stores, however, still remain vulnerable due to the general industry trends that are impacting brick-and-mortar chains in general.

If consumers shop less at malls, that's going to impact the Macy's recovery. Its stores are sometimes destinations themselves -- for example, a man who needs a suit and wants immediate tailoring may head to Macy's even if he has no other needs at the mall -- but lower traffic will cost the company sales from casual customers.

The risk for Macy's is that shopping, in general, will shift further to the purely digital world. The chain has improved its online products, but it's still primarily a physical company.

While the company does not break down its digital versus in-store sales in its earnings releases, Gennette did say "our digital business continues with double-digit growth" during the Q1 earnings call, though he did not offer any specific details. Macy's is investing heavily in augmented reality and virtual reality in an effort to boost digital clothing and furniture sales.

How vulnerable is Macy's?

Macy's was a digital laggard for some time. Now, while the company has work to do in growing its delivery options and refining its supply chain, it has become a leader among major retail companies.

Gennette has an aggressive plan for growth, and is testing new concepts to see if they work and implementing them when they do. The company is vulnerable if mall traffic plummets suddenly, but that's not likely to happen. Macy's may not be all the way back to the point where its CEO can say "mission accomplished, turnaround complete," but it's getting closer, and it appears it's going to make it.

More From The Motley Fool

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.