Macy’s Tightens Belt after Dismal Sales; to Close 100 Stores

Retailer reports 3.9% sales decline, 2% fall in comp sales in Q2 FY16

Source: Company's Website
Source: Company’s Website

Premier omni-channel retailer Macy’s Inc. (NYSE: M) announced its Q2 FY16 financial results on August 11th, 2016. The Cincinnati, Ohio-based company, together with its subsidiaries, operates stores, websites, and mobile applications to sell a range of merchandise, including apparel and accessories for men, women, and children, cosmetics, home furnishings, and other consumer goods. As of May 11th, 2016, it operated approximately 870 stores in 45 states, the District of Columbia, Guam, and Puerto Rico under the Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage, and Bluemercury brand names, as well as the macys.com, bloomingdales.com, and bluemercury.com websites. With FY15 sales of $27.1 billion, Macy’s also operates as a beauty products and spa retailer. Bloomingdale’s in Dubai is operated by Al Tayer Group LLC under a license agreement. Read more about Macy’s financial results below.

Q2 FY16 and H1 FY16 financial highlights

In Q2 FY16, Macy’s reported a 3.9% slump in sales to $5.87 billion compared to sales of $6.10 billion in the same period last year. Comparable sales on an owned plus licensed basis fell by 2% during Q2 FY16, but lower as compared to 5.6% in Q1 FY16, which was the steepest decline since Q2 FY09. On an owned basis, Q2 FY16 comparable sales declined by 2.6%, which largely resulted from the closure of 41 underperforming Macy’s stores in FY15.

For H1 FY16, Macy’s sales fell 5.7% to $11.637 billion from $12.34 billion in H1 FY15. For H1 FY16, comparable sales on an owned plus licensed basis declined by 3.8% and by 4.4% on an owned basis.

Source: Macy's
Source: Macy’s

During Q2 FY16, Macy’s struggling apparel category benefitted from a normalized weather pattern and better merchandise. Better-than-expected sales during the quarter likewise helped the company clear excess inventories while keeping pace with gross margins. The Company also witnessed a smaller decrease in tourist spending during prime summer travel months, supported by strengthened promotional events designed to increase customer traffic and conversion. Also, sales on international credit cards slipped 12% during Q2 FY16 compared to a 20% drop in Q1 FY16. Tourism accounts for roughly 5% of Macy’s annual sales.

Source: Macy's
Source: Macy’s

Macy’s Q2 FY16 operating income totaled $117 million, or 2% of sales. Excluding asset impairment and other charges primarily related to upcoming store closings of $249 million ($154 after tax or $0.49 per share) and non-cash settlement charges related to the company’s retirement plans of $6 million ($3 million after tax or $0.02 per share), operating income was $372 million or 6.4% of sales. Macy’s operating income was $436 million, or 7.1% of sales, in Q2 FY15.

For H1 FY16, Macy’s operating income totaled $393 million, or 3.4% of sales. Excluding asset impairment and other charges of $249 million and non-cash settlement charges related to the company’s retirement plans of $19 million, operating income was $661 million, or 5.7% of sales. Macy’s operating income was $845 million, or 6.8% of sales, in H1 FY15.

Lower sales and operating income hurt the bottom-line; Macy’s reported diluted EPS of $0.03 in Q2 FY16 versus $0.64 in the year-ago period. Excluding asset impairment and other charges primarily related to upcoming store closings and non-cash retirement plan settlement charges of $255 million, or $0.51 per share, EPS was at $0.54.

For H1 FY16, Macy’s EPS was $0.41 ($0.94 per share excluding asset impairment and other charges primarily related to upcoming store closings and non-cash settlement charges related to the company’s retirement plans), compared to diluted EPS of $1.19 in the year-ago period.

For H1 FY16, Macy’s net cash from operating activities was $560 million compared to $398 million in H1 FY15. Net cash used by investing activities in H1 FY16 was $338 million compared to $615 million in the year-ago period.

Closure of 100 stores

Macy’s has been struggling to lure shoppers into its stores in recent years as consumers have shifted to online shopping in a big way and are spending more towards experiences rather than apparel. Coming under pressure from activist investor Jeff Smith, the CEO of Starboard Capital, Macy’s is working to unlock value to its huge real estate portfolio, which includes landmark properties such as its Herald Square store in New York and the Union Square store in San Francisco. As part of its plans to drive profitable growth, Macy’s announced that it will close about 100 of its stores, or about 15%, by early 2017, while still maintaining a significant bricks-and-mortar presence in 49 of the top 50 U.S. markets. Macy’s will also close a few stores where there is another location nearby, and use the savings from its store closings to focus on its highest-potential locations and invest more aggressively in digital and mobile channels.

The number of stores that Macy’s is planning to shut represents annual net sales volume of about $1 billion. The reduction in EBITDA is expected to be offset by expense savings beyond those associated with store closings. Macy’s also said that it would add new vendors to its existing stores, enter into more license agreements, and increase the size of its staff. The company also said it was in talks to sell its Men’s Store on Union Square in San Francisco for redevelopment. However, Macy’s said the upcoming store closings would not affect its Bloomingdale’s division.

Store update

M4

Macy’s currently operates 728 stores, including 675 of its traditional full-price locations. It has shuttered roughly 90 Macy’s stores over the past six years, and opened 13 new locations. It opened six off-price Macy’s Backstage stores in 2015 and is also expanding the footprint for its Bluemercury beauty chain. In Q2 FY16, Macy’s opened seven Bluemercury freestanding specialty stores and opened eight Macy’s Backstage and seven Bluemercury shops inside Macy’s stores.

Other highlights

M5On June 23rd, 2016, Macy’s reported that CEO Terry Lundgren, who has been at the company’s helm since 2003, will step down in 2017. Jeff Gennette (shown alongside), who was elected president in March 2014, will assume the CEO position in Q1 FY17. Lundgren, 64, will continue as executive chairman and work alongside Gennette. Gennette, 55, was the chief merchandising officer for five years before being elected president. Before that, he was president and CEO of Macy’s West in San Francisco.

Restructuring on track

Beginning in FY15 and continuing in FY16, Macy’s has been reducing expenses and tightening capital spending. The Company targets to reduce annual SG&A expenses by $500 million (net of growth initiatives) from previously planned levels by FY18, with incremental progress in FY16 and FY17. In FY16, Macy’s has identified and announced approximately $400 million in annualized reductions. Macy’s aims to reduce capital spending to an estimated $900 million in FY16 from the $1.1 billion in capital spent in FY15, which will be reinvested in technology, digital advancement, and physical improvements to top-end stores.

Share repurchases

Macy’s did not repurchase any shares of its common stock in Q2 FY16. As of July 30th, 2016, the Company has remaining authorization to repurchase up to approximately $1.9 billion of its common stock.

Guidance for full year FY16

Macy’s reiterated its full-year FY16 guidance, which forecasts EPS of $3.15 to $3.40, excluding asset impairment charges and retirement settlement charges. Full-year FY16 comparable sales on an owned plus licensed basis sales is forecasted to decrease in the range of 3% to 4%, with comparable sales on an owned basis to be approximately 50 basis points lower. Macy’s expects healthier performance in Q4 FY16, owing to better confidence about consumers’ ability to spend due to growth in auto sales and home improvements.

Stock Performance

M6Macy’s stock ended the day at $39.82, gaining 0.03%, at the close on Friday, August 12th, 2016, having vacillated between an intraday high of $39.92 and a low of $38.94 during the session. The stock’s trading volume was at 15,730,500 for the day. The Company’s market cap was at $12.28 billion as of Friday’s close.

Industry outlook

Macy’s Inc., the 6th largest online retailer in the U.S. according to Bloomberg, reported dismal sales and earnings in Q2 FY16, a reflection of the broader industry scenario in which departmental stores in general have been struggling with stiff competition from online and off-price retailers. They are also grappling with pressure as shoppers are spending more on big-ticket items such as electronics and cars than on apparel. In the first few months of 2016, apparel retailers also had to bear the brunt of unfavorable weather and a strengthening dollar, which in turn reduced tourist spending.

Macy’s and other major apparel retailers such as Kohl’s Corp. (NYSE: KSS) and Nordstrom Inc. (NYSE: JWN) are under intense pressure because of falling foot traffic at shopping malls and heightened competition from internet players such as Amazon.com Inc. (NASDAQ: AMZN). Nordstrom is trying to keep its clothing relevant to shoppers in part by selling popular brands that have limited distribution elsewhere. High-end retailer Michael Kors Holdings Limited (NYSE: KORS) said it would reduce the amount of merchandise displayed in departmental stores, while maintaining higher prices in shops that frequently roll out heavy sales to retain an exclusive, luxurious status.

Another trend is that shoppers who prefer physical stores are gravitating toward more specialty retailers or malls that offer experiences such as outdoor entertainment and dining. It hence comes as no surprise that as department stores and shopping centers have cut back on customer service, consumers are now opting for the convenience of e-commerce. Many apparel retailers have recognized the need to change their department store model, and resort to digital and omni-channel retailing to beat dismal sales. Many departmental apparel retailers are also making efforts to launch exclusive product ranges with celebrities as a means to do away with standardized inventory that has reduced the appeal of departmental stores.

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