Macy’s Inc. had a bag full of surprises last quarter — and Wall Street cheered them, sending the retailer’s shares up Thursday by almost 20 percent.
“It was much better than we expected,” Jeff Gennette, Macy’s Inc. chairman and chief executive officer, told WWD, discussing the retailer’s performance. “We satisfied customer demand differently from how we thought we were going to. Our buyers are scrappy. They reacted to the consumer demand.”
Gennette said Macy’s generated $800 million more in volume than what was anticipated for the second quarter, when the company went into the black amid a sales increase to $5.65 billion in the quarter versus $3.56 billion in the year-ago period, which was severely impacted by the pandemic. Comparable sales were up 62.2 percent last quarter.
Net income in the quarter ended July 31 came to $345 million, or $1.08 a diluted share, compared to a loss of $431 million, or $1.39 a share, in the year-ago period. Operating income was $597 million versus an operating loss of $631 million in the 2020 quarter.
The strong quarterly results pushed Macy’s stock up 19.6 percent to $21.61 at the close of the market Thursday.
Digital sales declined 6 percent versus the second quarter of 2020 and grew 45 percent versus the second quarter of 2019. Digital penetration was 32 percent of net sales, a 22 percentage-point decline from the second quarter of 2020, but a 10 percentage-point improvement over second-quarter 2019. The decline in digital sales compared to the prior year was driven by the shift of omnichannel customers to stores, which are now fully open.
Macy’s has beat estimates for both earnings per share and sales each quarter since the second quarter of 2020.
Asked Thursday if the recent gains will be hard to match or beat next year, Gennette replied: “When we look right now at what happened in the second quarter, there were certainly some economic and macro tailwinds,” including lots of pent-up demand, government stimulus and job gains, which won’t be seen next year.
“But we also got a lot of traction from our Polaris strategy,” Gennette explained. “The stuff that was really hot for us earlier in the pandemic and in the first quarter — fragrances, fine jewelry, sleepwear, home textiles categories and digital — that beat kept up. We didn’t see any slippage there.”
On the unexpected side, “Dresses, classic sportswear, any polished sportswear, INC, Alfani, Charter Club, that all came back more strongly than we expected, as did men’s clothing, men’s dress shirts, neckwear, dress shoes and go-out categories — what kind of top to wear on a Friday night date, or what to wear to a wedding, a special occasion. That was all encouraging.”
Macy’s Polaris strategy involves efforts to strengthen customer loyalty and personalization; improve the quality of its fashion offerings and sharpen the focus of private brands; accelerate digital sales; close 125 stores from 2020 to 2022 and upgrade the top 250 stores; grow off-price operations, and modernize the supply chain.
Gennette said going forward he sees Macy’s benefiting from two other tailwinds: the return of international tourism, which he predicts will happen in the second half of 2022, and the return of office workers to urban settings, which he said has been delayed due to the COVID-19 Delta variant but should happen later this year, though that all depends on whether the pandemic subsides or not, Gennette added.
The retailer took in 5 million new customers last quarter, many of them younger and more diverse than Macy’s core customer, and most often first experiencing the retailer through its website. Gennette wouldn’t comment on the average age of the Macy’s customer or whether it’s getting lower.
In a move to attract younger and more fashion-oriented customers, Macy’s this year launched contemporary boutiques inside 160 locations, selling denim, premium brands and private brands called And Now This and Bar III, as well as Free People and Guess. A Macy’s contemporary sitelet went live in April.
In another move to attract younger customers — and their parents — Macy’s has begun selling the Toys “R” Us assortment online and will roll out Toys “R” Us areas inside more than 400 Macy’s stores next year. The partnership was made with WHP Global, the New York-based firm that acquires consumer brands and has Anne Klein, Joseph Abboud and Lotto in its portfolio, as well as a controlling interest in Toys “R” Us and Babies “R” Us.
Gennette acknowledged that Macy’s has been limited in its assortment of toys for holiday at full-line stores. “Our market share in toys is quite small. We are going after the category with a lot more vigor. Those eyeballs will translate into other purchasing.” The partnership with WHP, said Nata Dvir, Macy’s chief merchandising officer, “allows Macy’s to significantly expand our footprint in that category, while creating more occasions for customers to shop with us across their lifestyles.”
Macy’s other key partnerships include Finish Line, Sunglass Hut, Starbucks, Lids and LensCrafters. “We’re always looking. Electronics has always been a category we are interested in,” said Gennette.
Macy’s capital budget is increasing from $650 million for this year to $1 billion annually over the next few years, and will be heavily allocated to digital, data analytics and technologies, including systems and software that simplify the customer journey and improve the speed and convenience of shopping online, and a new app.
Macy’s ended the second quarter with about $2.1 billion in cash, allowing the company to invest back in the business, de-leverage its balance sheet, and return capital to shareholders. As previously announced, the company voluntarily repaid $1.3 billion in senior secured notes on Aug. 17. Macy’s Inc. has long-term debt of almost $3.3 billion.
Macy’s Inc., which operates the Macy’s, Bloomingdale’s and Bluemercury brands, is reinstating its regular quarterly dividend at 15 cents a share on its common stock, resulting in an annual return of cash to shareholders of nearly $200 million. The dividend is payable on Oct. 1 to shareholders of record at the close of business on Sept. 15. The company has authorized a $500 million share repurchase program.
Macy’s also operates off-price stores under the Macy’s Backstage and Bloomingdale’s The Outlet names, and scaled down, specialized versions of Macy’s called Market by Macy’s. A scaled-down version of Bloomingdale’s called Bloomies is scheduled to open later this month.
The company raised its guidance for this year. Sales are now seen reaching between $23.55 billion and $23.95 billion, compared to previous guidance of $21.73 billion to $22.23 billion. Adjusted diluted EPS are seen at $3.41 to $3.75, compared to previous guidance of $1.71 to $2.12.
While there is reason for optimism, concerns perpetuate largely because of the unpredictability of the pandemic. This summer, COVID-19 cases have continued to rise again across the country, worrying retailers, particularly those selling “nonessentials.” Executives are keeping a watchful eye on the path of the pandemic and hope that government officials don’t reimpose the kind of restrictions or mandated closings they saw last year.
Macy’s, like other retailers, confronts labor shortages that could impact service for holiday. International tourism, accounting for 3 to 4 percent of Macy’s Inc. revenues, has dried up, though domestic tourism is picking up.
There’s also inflation, supply chain bottlenecks, urban stores remain far less trafficked than suburban units, and there are high costs associated with fulfilling digital orders. Macy’s needs to get more shoppers to take advantage of the buy online pick up in store service, or BOPIS, to save on delivery costs. Macy’s officials say the company is developing ways to increase BOPIS usage, as well as make shipping from stores faster and more efficient through automation.
Regarding supply chain bottlenecks, Gennette said Macy’s is finding the inventory it needs in home, fragrances and jewelry, while the biggest issues center around apparel and women’s shoes.
“From off-price to luxury we are emerging from the pandemic a stronger company than when the pandemic began,” Gennette said during his conference call with retail analysts Thursday. “We have come through what I hope was the worst of the pandemic.”
He said back-to-school had a strong start, with high, single-digit improvement versus 2019, and selling across the board, in girls and boys. Denim, T-shirts, uniforms, backpacks and active were all singled out.
With supply chain bottlenecks and reduced inventories, Macy’s has reduced its price promotions and couponing.
“We are committed to growing our AUR (average unit retail price) and our retail margins,” Gennette said, adding he hopes the reduced promoting can go through holiday and into 2022, though as the supply chain normalizes and more product is available, prices are affected. Gross margin last quarter was 40.6 percent, up from 23.6 percent in the second quarter of 2020 and up 180 basis points from the second quarter of 2019.
At the Macy’s division, comparable sales were up 5.2 percent compared to the second quarter of 2019 and saw a 15.6 percent trend improvement to the first quarter of 2021. Bloomingdale’s comps rose 11.5 percent compared to the 2019 period and saw a 18.6 percent trend improvement to 1Q21. Bluemercury’s comp sales rose 2.2 percent compared to the 2019 quarter and saw a 17.6 point trend improvement to the first quarter of 2021.