Macy’s Execs Talk Momentum, Handling Headwinds and 2022
Macy’s Inc. is attracting new customers, building confidence on Wall Street, and remains bullish on healthy gains for the rest of this year.
But while successfully transcending supply chain and COVID-19 headwinds this year, in 2022 there could be new headwinds swirling around including inflation, rising delivery expenses, price promoting and challenges “lapping” the robust sales gains this year stemming from consumers getting back out again to socialize and shop after being cooped up by COVID-19.
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“We have been able to successfully reengage our core customer through the pandemic and the headline for us is being able to attract new customers,” Jeff Gennette, Macy’s Inc. chairman and chief executive officer, said Thursday at the Goldman Sachs 28th Annual Global Retailing Conference.
Last quarter, “We beat expectations for the third consecutive quarter,” Gennette said. The retailer reported net income of $345 million for the quarter ended July 31, compared to a loss of $431 million in the year-ago period. Sales rose to $5.65 billion versus $3.56 billion a year ago, and 2021 sales guidance was raised to between $23.55 billion and $23.95 billion, compared to previous guidance of $21.73 billion to $22.23 billion.
“So we have momentum,” Gennette said, adding Macy’s is being driven by data-centric loyalty and personalization efforts, pricing science, inventory management and agility in adjusting its wide luxury to off-price offering. He also cited Macy’s newfound inclination to add categories previously not carried — home fitness, pets, outdoor recreation — as well as expanding in toys through the new partnership with Toys ‘R’ Us.
“Consumers have money to spend and we’re just confident that spending will continue, even with all the [coronavirus] restrictions that might be coming with the new variants, changes in back-to-work, or with what’s going on with the supply chain. And all through this, we’ve seized every opportunity to capitalize on the breadth of our offering with all of these changing consumer demand patterns, and just super proud of our team and how they’ve responded. That level of response, that level of agility is just going to be critical to us sustaining momentum whatever comes our way going into 2022,” the CEO said.
So what does Gennette see for 2022? “We do expect continued traction from our Polaris strategy,” which is Macy’s three-year strategy, unveiled in February 2020, centering on personalization and the loyalty program, expanding assortments, accelerating digital growth, closing 125 department stores, opening smaller scale off-mall stores, boosting some private brands into billion-dollar businesses, and reducing costs.
“Some of those pillars are in their early innings,” Gennette said.
Still, he’s anticipating new headwinds in 2022. “We are going to be lapping the stimulus package. We are going to be lapping the COVID reentry of customers in the second quarter,” Gennette said.
“But we also think there are going to be tailwinds,” arising from workers returning to their offices assuming COVID-19 dissipates, and a recovery in International tourism. Gennette sees international tourism picking up in late 2022 or in 2023. “Our big urban doors are tourist magnets, which frankly right now are suffering from lack of international tourism and the lack of office workers, and really relying on the strength of the core customer who lives around those stores.
“In 2022, we will be very focused on market share, combating the headwinds we have with the tailwinds we expect.”
“We’re not concerned about inflationary pressures in the back half of this year,” said Adrian V. Mitchell, Macy’s executive vice president and chief financial officer. “Yes, we’re still looking at the upcoming spring season where there is a possibility there could be increased pricing pressure not only from inflation but also from promotions, as well.…The difference in our brand from where we were a year ago is just the degree of sophistication and in the use of data science” to adjust pricing and merchandise content.
Mitchell said Macy’s is “pursuing a lot of strategies to mitigate delivery expenses,” like working to increase the percent of orders picked up in stores through better inventory placement, data science, providing same-day and next-day pickup options, reducing the number of packages customers receive by reducing split shipments, and rewarding customers for “productive and profitable shopping behavior,” such as picking up their packages rather than having them delivered.
Mitchell said Macy’s will end the year with about 35 percent of its value generated through digital sales, and that by 2023, the retailer sees its e-commerce generating $10 billion in sales.
He said capital expenditures will increase from $650 million this year to $1 billion annually over the next several years with investments heavily targeted toward strengthening omnichannel capabilities, digital shopping experiences, data analytics and technology.
Mitchell said of the 125 planned department store closings over a three-year period, 60 have been closed so far. “How many stores we ultimately close remains to be determined,” he said.
On promotions, this year the level has been lower than historical levels, Mitchell said. “We’ve been thoughtful about the categories that need promotion, and we’ll continue to do so while we’re actually very focused on higher AURs and full-price sell-throughs. So there’s just a number of initiatives that we’re testing, that we’re scaling, that we’re working through in order to further build confidence and drive momentum as it relates to our margins. And some of the things that we’re looking at that are still ahead of us include rolling out a promotional effectiveness tool this fall, which will really give us the ability to better hindsight what promotions are most effective.
“We’re looking also this fall at a competitive price-rating tool that ensures we’re delivering value to our customers every day. And next year, we’re looking to roll out a promotional planning tool that will facilitate more effective timing of our POS events and help us better analyze what’s working and where we can make improvements.”
Gennette said that so far in the third quarter, sales expectations haven’t changed, though back-to-school has moderated a little bit. Apparel is still positive, but there are other categories, denim in general, young men’s and women’s sportswear just continue to be strong. Men’s tailored clothing is decreasing but gained market share, and women’s shoes are most affected by supply chain issues.
“We are cautiously optimistic as we head into holiday. We believe strong demand is going to continue. We are watching very carefully supply chain issues, particularly in apparel categories and shoes.”
Highlighting what’s performing best, Gennette cited the Backstage off-price business, where the average item price is $13 to $14 (Macy’s full-line average is $35 to $36; Bloomingdale’s just under $100). Backstage departments are inside almost 300 Macy doors, and 18 percent of those visiting those stores shop both Backstage and the full-line departments, and spend 29 percent more. “Those customers are very profitable for us,” Gennette said. “They are also younger and more diverse.” Despite supply chain issues, Backstage is in a good stock position, even in apparel, Gennette said.
“Our big objective is to be a one-stop shop particularly for the Millennial mom. That’s where the Toys ‘R’ Us partnership came in,” Gennette said. “Millennial parents were Toys R Us kids. Toys is a category that our customers associate with us, but it was a category where we have very low share.” Toys ‘R’ Us is currently on Macy’s website, and will be in 400 stores next year. Toys ‘R’ Us will have a “massive” presence in flagship stores, in other stores it will be significant, Gennette said.
Going forward, Gennette said the company is focused on “building prowess” in live video shopping, enhancing the beauty category with site-lits, adding a fragrance finder in the first quarter of 2022 and “more robust beauty adviser interface.”
