Macy’s Inc. Shows Q3 Declines but Prepared to Meet Christmas Challenges
What a difference a year makes. And that’s certainly true for Macy’s Inc. and the holiday season.
“A year ago everybody was talking about the supply chain, spooking customers into early shopping. If you didn’t buy it right away, there would be nothing left for Christmas. This year, with all the press about inventory gluts, there are no concerns about running out of inventory before the holiday,” Jeff Gennette, Macy’s Inc. chairman and chief executive officer, told WWD in an interview Tuesday.
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He spoke right after the retailer reported that its net income dove by almost 55 percent to $108 million, or $0.39 a diluted share, from $239 million, or $0.76 a diluted share, in the year-ago quarter. This compares to diluted earnings per share of $0.01 in the third quarter of 2019.
The industry’s changed inventory situation, as well as inflation and the increasingly promotional retail landscape, explains why Macy’s and other big retailers, including Kohl’s and Target, saw third-quarter declines and witnessed a slowdown in spending last month.
Macy’s reported total sales in the three-month period ended Oct. 29 declined 3.9 percent to $5.23 billion from $5.44 billion a year-ago, but inched up 1.1 percent from the third quarter of 2019. Comparable third-quarter sales this year were down 2.7 percent on an owned-plus-licensed basis.
Inventories were up 4 percent versus 2021, and down 12 percent from 2019 levels, reflecting ongoing planning and supply chain discipline considering the widespread reports of inventory gluts this year.
Still, Macy’s third-quarter results beat the expectations of Wall Street, which on Thursday pushed the retailer’s stock price up 15 percent, or $2.96, to $22.67.
Meanwhile, Kohl’s reported Thursday that its third-quarter net income fell 60 percent to $97 million, or 82 cents a diluted share, down from $243 million, or $1.65, a year ago. Revenues decreased 7 percent to $4.3 billion from $4.6 billion. Shares of Kohl’s increased 5.4 percent to $31.42.
Target on Wednesday reported $712 million in third-quarter profits, a steep decline from the year-ago $1.48 billion in profits. Target’s top-line results were slightly more favorable with $26.5 billion in total revenues, compared with $25.6 billion a year ago.
At Macy’s, Gennette said sales started drooping in mid-October. While traffic in stores and on the company’s websites since then has been similar to last year, the selling conversion rate has been down, at 26 percent or 27 percent, compared to 30 percent last year, Gennette said.
He described what could evolve into a seesaw pattern for holiday sales, indicating that he’s hoping to see a “more pronounced spike” in business during the Black Friday-Cyber Monday period, and a “higher pitch” in the business between Thanksgiving and Christmas, compared to 2021. Across retailing last year there was widespread early holiday shopping, even before Halloween, leading to a stretched out season of gift shopping.
With the business slowdown in recent weeks, Gennette said Macy’s is taking deeper markdowns on summer weight merchandise, though he underscored that inventories are where he wants them to be.
“Macy’s, Bloomingdale’s and Bluemercury are super fresh. Freshness is the lifeblood of a fashion retailer,” Gennette said. “Our stock-to-sales ratio is very healthy.
“We’ve really built up our gift inventories,” Gennette added, noting the rollout of Toys “R” Us shops inside Macy’s, and that beauty and apparel are in great shape.
He said 55 percent of the total inventory is new, which is 30 points ahead of 2019. In addition, “We have a higher concentration of exclusives.”
Still, with the increasing uncertainty around how much Americans will spend on gifts this holiday season, “We will take the required markdowns so we are clean heading into 2023,” Gennette said.
“For everybody, with the cumulative effect of inflation, you need to be mindful of the amount of inventory that is out there,” he said. “I feel good about the way we can react and what we can control.”
Gennette said anything dress up, anything with sparkle, velvets, luxury, tailored sportswear, sweaters, fleece, travel-related merchandise, women’s shoes, fragrances, fine jewelry (notably diamond studs) and cosmetics gift sets are among the areas seeing double digit sales gains.
On the other hand, sleepwear, casual sportswear, active and soft home — categories that excelled during the pandemic — are down double digits.
Key factors that should help Macy’s Inc. navigate through holiday 2022: the colder weather; the Toys “R” Us rollout, the launch of the marketplace on macys.com in late September, thereby expanding brand and product offerings, and new and improved pricing and markdown management systems.
The Macy’s CEO also cited the company’s “healthy” receipt reserve so buyers can jump on hot categories and brands as they emerge.
Within the Macy’s marketplace, units per order are above the macys.com average. “Marketplace further cements our status as a one-stop shop,” he said. A marketplace on bloomingdales.com will launch next year.
Gennette revealed another strategy that should support the holiday performance. Inside 35 Macy’s department stores across the country, 30,000-square-foot mini distribution centers have been opened. The mini DCs, he said, will mitigate labor costs helping profits, and provide faster deliveries. Macy’s made room for them on upper floors by downsizing space in under-productive areas such as home, kids, intimate and casual women’s apparel.
Macy’s reaffirmed its forecast for $24.34 billion in annual sales this year, and raised its earnings expectations to $4.07 to $4.27 per diluted share, from $4 to $4.20.
Last quarter, earnings before interest, depreciation and amortization came to $392 million, versus $757 million in the third quarter of 2021.
By division, Macy’s comparable sales last quarter were down 4.4 percent on an owned basis and down 4 percent on an owned-plus-licensed basis.
Bloomingdale’s comparable sales on an owned basis were up 5.3 percent, and on an owned-plus-licensed basis were up 4.1 percent.
Bluemercury comparable sales were up 14 percent on an owned and owned-plus-licensed basis.
Gross margin for the quarter was 38.7 percent, down from 41 percent in the third quarter of 2021. The decline was attributed to increased promotions and permanent markdowns within the Macy’s brand, as the company sold through slower moving categories, including casual apparel, soft home and warmer weather seasonal goods.
“Macy’s results demonstrate its relatively good operating execution, particularly around inventory management in a volatile year and compared with weaker results as reported today by Kohl’s,” David Silverman, senior director at Fitch Ratings, wrote in a report issued Thursday. “While Macy’s sales were down modestly with margins weaker as expected against a strong 2021 performance, inventory is up only modestly compared to last year. More manageable inventory levels relative to peers should limit Macy’s need to aggressively mark down merchandise but also allow it to buy more popular styles in-season. Kohl’s weaker results, as preannounced recently, demonstrates the company’s greater challenges navigating the complex environment.”
“Our Polaris strategy is working. In the third quarter, we achieved solid top-line results and a strong beat to our bottom-line guidance. Macy’s brand position as a style and fashion source resonated with our customers, while luxury continued to outperform at Bloomingdale’s and Bluemercury,” Gennette said in his prepared statement. “Retail is detail, and our talented and agile team are executing well to compete. We know the consumer is under increasing pressure and has choices on where to spend. As a leading gifting destination with fresh inventory across the value spectrum, we are ready to meet our customers’ needs this holiday season.”
As Macy’s Inc. chief financial officer Adrian Mitchell added, “We are operating from a position of strong financial health — with appropriate levels of inventory, a strong balance sheet with ample liquidity, investment grade credit metrics and fixed interest rate debt in a rising interest rate environment. We have the tools, data-driven processes and talented teams to manage through this uncertain time and are committed to long-term, profitable growth.”
