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Macy's Polaris Strategy on Track, Soft Store Sales a Worry

Zacks Equity Research
·4 mins read

Macy’s, Inc. M hasn’t been in its best shape, thanks to business disruptions caused by the coronavirus pandemic. This was well reflected in the company’s second-quarter results, with the top and the bottom line plunging year on year. In fact, the company posted a loss in the said quarter.

However, the company is striving to stay afloat on the back of strategies like investing in digital growth, optimizing store portfolio and reducing costs. Let’s take a closer look.

Pandemic Casts a Pall on Sales

The coronavirus outbreak has significantly hindered Macy’s business activities. During second-quarter fiscal 2020, store sales declined 61% year on year. Management highlighted that although it had begun the process of gradual store reopening in the first week of the quarter, it could only reopen all stores by the end of June.  Moreover in July, the company witnessed pockets of COVID-19 resurgence in regions like Florida, Georgia and Texas among others. As a result, the company exited the quarter with store sales down as much as 40% in July.

Additionally, comparable sales during the second quarter fell 34.7% on an owned basis and down 35.1% on an owned plus licensed basis. The company’s top line declined 35.8% on a year-over-year basis.

While the company is hopeful about its reopened stores, it is cautious about the increasing number of coronavirus cases that may derail the recovery in the back-half of the year. Management highlighted that store sales recovery is likely to remain slow, especially in urban areas. Additionally, the company is assuming that international tourism sales will remain soft for remainder of the year.

We note that shares of the company have declined 5.9% in the past three months against the industry’s rise of 1.5%.

 

Polaris and Other Growth Strategies

Macy’s investments in its digital platform have been yielding. During the second quarter, digital sales surged 53% from the year-ago quarter’s figure and contributed 54% to total owned comparable sales. The company plans to continue investing in its digital platform, especially in terms of capacity expansion.

Markedly, digital growth is an important component of the company’s Polaris Strategy. This three-year strategic endeavor also includes strengthening customer relationships, expansion of assortments, optimizing store portfolio and reducing costs.

Speaking of store optimization, the company plans to shutter nearly 125 stores in lower tier malls that are least productive and upgrade the remaining by applying Growth treatment. The treatment comprises of merchandising strategies, technology improvements, talent development and local marketing. In terms of boosting customer engagement, the company expanded its Star Rewards Loyalty program. It is also on track with expanding product offerings across various price points

Further, the company expects to generate savings of roughly $365 million in fiscal 2020 and about $630 million on an annualized basis. Majority of these savings are likely to arise out of elimination of corporate and management jobs. It is also on track with controlling SG&A expenses. During the second quarter, SG&A expenses declined 35.8% year over year. The company highlighted that the Polaris strategy will help attain gross savings of nearly $2.1 billion by 2022

Wrapping Up

Macy’s strategic efforts indicate that the company has carefully evaluated its business operating model to bring itself back on growth trajectory. We expect these efforts to help this Zacks Rank #3 (Hold) company to offer some cushion against the downsides stemming out of poor store performance.

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Target TGT, sporting a Zacks Rank #1 (Strong Buy), has an expected long-term earnings growth rate of 7.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Big Lots BIG has an expected long-term earnings growth rate of 7.1% and a Zacks Rank #2 (Buy).

Kroger KR has an impressive long-term earnings growth rate of 6.2% and a Zacks Rank #2.

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