Macy’s grappling with ‘terminal decline’

Macy’s has heralded its third quarter figures as a sign that the company is getting back on track, noting that the sales performance beats that posted over the first half of the year.

While the statement is technically correct, it is largely case of wishful thinking and unfair comparisons.

If anything these figures show a company grappling with what looks like terminal decline.

In truth, the first half was dragged down by a terrible first quarter when sales tumbled by levels not seen in over a year; this provides for an extremely soft comparison. Moreover, sales performance has actually worsened since the prior quarter at both the total and comparable levels.

There is continued erosion in profitability, where net income fell by 87 per cent; this follows a 46 per cent decline over the same period last year. This is the seventh consecutive quarter in which sales and profits have both declined. It is a telling fact that this quarter Macy’s made just 0.2 cents for every dollar it took in revenue. This is a weak position that, given the general direction, puts the company on a pathway to long term unprofitability.

Its inability to get the retail side of its business to work, is one of the reasons Macy’s is looking to monetise its assets. The partnership with Brookfield Asset Management, announced last week, will help with that – as will the ongoing sale of underperforming stores. This course is prudent, not least because Macy’s does have a strong asset base which can yield significant capital – as the sale of the Union Square, San Francisco store for $250 million has proved.

It is encouraging to see that Macy’s will use some of the capital to invest and develop locations it sees as having future potential. This is unlike the position of Sears which has used asset monetisation to fund the day to day operations of the business, something that suggests a company circling the drain. As such, Macy’s short term future is secure, while over the medium to longer term it has the scope and funds to engineer a turnaround.

That said, revitalising the business will not be easy. Shopping trends are firmly against Macy’s; and its brand, while not completely diminished, is most certainly tarnished. It needs to completely overhaul the experience to make stores easier to shop, more interesting to browse, and more relevant to today’s shopper. It also needs to develop a much more fulsome exclusive or own label offer to differentiate it from rivals. There are some signs of this activity in its partnership with Brookstone, which will bring a range of exclusive gifts to stores this holiday season.

Looking ahead to the holidays, there should be some upside for Macy’s, if only because of soft comparatives as a result of last year’s very weak trading, high discounting, and excess inventory. This should allow Macy’s to pull out a much better performance this year, potentially breaking the trend of long term profit and sales declines.

  • Neil Saunders is CEO of retail analyst Conlumino.


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