Things Keep Getting Worse For Macy’s

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Macy’s, it seems, can’t catch a break. The beleaguered retail chain, which has been aggressively closing stores in recent months, announced more bad news Thursday: Sales were down in the first quarter of the year, leading to a 39 percent drop in profits.

As a result, its stock price plunged almost 17 percent Thursday, to its lowest level since 2011.

Macy’s steady decline, analysts say, is the result of factors including the demise of shopping malls, as well as competition from online stores and off-price retailers like TJ Maxx. Another issue: The company tends to sell run-of-mill products that shoppers can find more easily – and often more cheaply – elsewhere.

“Here’s the unfortunate thing about Macy’s: There’s nothing that sets it apart,” said Milton Pedraza, chief executive of the Luxury Institute, a research firm. “It’s crowded, it’s messy, the service is poor. The business model of Macy’s is no longer justifiable in a world dominated by Amazon and Walmart.”

The company’s woes come as other longtime retailers like Sears and JCPenney face similar headwinds. Americans are increasingly skipping the shopping mall in favor of buying online, which means department stores are left hoards of inventory and pricey real estate. Macy’s last year announced plans to close 100 stores, and analysts said more closures may be in the works if the company’s fortunes don’t change soon.

“There are so many structural issues here that it’s going to take years for all of these challenges to play out,” said Sucharita Mulpuru, analyst for Forrester Research. “This is a company that is fundamentally tied to shopping malls, and I don’t know that there’s any hope of rejuvenation there.”

After a dismal holiday season, 2017 hasn’t turned out to be much better. Same-store sales – a closely-watched industry metric – fell 4.6 percent, marking the ninth consecutive quarter of declines. Profit, meanwhile, plunged nearly 40 percent to $70 million from $115 million a year earlier.

“These are challenging times for retail, especially for mall-based department stores,” Jeff Gennette, who took over as Macy’s CEO in March, said in a Thursday call with Wall Street investors. “We don’t have our head in the sand as to the significant challenges we face in getting the business growing again. We certainly don’t have all the answers yet, but we are working on them with a sense of urgency.”

To that end, he said, the company is revamping its fine jewelry and women’s shoe departments, adding furniture and mattresses to 60 locations, and forging exclusive partnerships with brands like DKNY. It is also planning to expand its buy-online, pick-up-in-store options to win over shoppers who have grown accustomed to shopping from their homes.

“The consumer has fundamentally changed,” Oliver Chen, an analyst for Cowen Group, told CNBC earlier this year. “Customers expect speed, and the way in which customers shop now, they want their goods immediately.”

The retailer is facing considerable competition online. Amazon.com, which has a private-label clothing brand and is experimenting with custom-fit items, is widely expected to usurp Macy’s as the country’s largest clothing retailer this year. (Jeffrey Bezos, Amazon’s founder and chief executive, owns The Washington Post.)

Macy’s, founded 160 years ago in New York, has been a household name for decades. Through the years, it has bought up regional chains, including Hecht’s, Foley’s, Rich’s and Bullock’s, and consolidated them into the country’s largest department store brand. Today, Macy’s parent company also owns the department store Bloomingdale’s and beauty chain Bluemercury.

In recent months, it has begun experimenting with its own off-price store, Backstage, which it has been quietly opening inside existing locations. The goal, executives said, is to target shoppers who might otherwise go to Nordstrom Rack or TJ Maxx. Two-thirds of Macy’s most loyal customers and 70 percent of millennials shop at off-price retailers each month, Gennette said.

“Macy’s needed to solve for that,” Gennette said, adding that the company is also lowering prices in departments such as housewares. “We’re obviously dropping our prices to be competitive. We don’t want to have like-products that are more expensive online or in our stores than our competitors. We have pushed to make sure we’re giving customers value.”

But Pedraza says that may not be a viable strategy: “All they’re going to do is dig a deeper hole. They may get a bit of a dead cat bounce that way, but other than that it’s not a long-term strategy.”

In recent years, analysts say, retailers have been engaged in a race to the bottom, offering never-ending promotions and sweeping discounts as a quick fix for long-term problems. Macy’s has been no exception. But the plan has backfired: Customers have become trained to expect large-scale discounts, and retailers are settling for slimmer profit margins.

“If you missed last week’s sales numbers, you can literally make that up with a promotion this week,” Mulpuru said. “That’s the only short-term lever retailers have. Anything else – new real estate, new inventory, new vendors – is going to take six months to three years, which is why retail has degenerated into a promotional business.”

As Macy’s executives scramble to shore up sales, they are also finding creative ways to bring in extra income. The company has sold off the top floors of stores in Brooklyn and Seattle, to be converted into office space. Its flagship in New York’s Herald Square, which takes up an entire city block, is also being floated by analyst as a potential source of cash.

“The value of that real estate alone is billions of dollars,” Mulpuru said. “This is a company that’s in trouble, but they’ve still got aces in their back pocket. It takes a long time to kill a retailer, and I don’t think Macy’s is there, yet.”

(c) 2017, The Washington Post · Abha Bhattarai 

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