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Macy’s Struggles to Revive its Dying Star as 125 Stores Get Set to Collapse

By:

Senior Market Analyst at Interactive Brokers

Macy’s (NYSE: M) continues to contribute to the demise of retailers’ brick and mortar business models, after initiating a revitalization strategy that will include significant shop closures and workforce reduction.

The flagging department store chain appears to have long-struggled with customer engagement, as well as providing an in-store shopping experience that rivals the impetus to shop online, or simply someplace else— and its shareholders have certainly taken notice.

The company’s stock, for example, has been hammered over the past year – having plunged nearly 34.4% since its early April 2019 high of US$25.975. It has also generally floundered since hitting its latest 52-week trough set in mid-August 2019, having ticked up roughly 19.25% to trade at around US$17.05 intraday Wednesday, according to the IBKR Trader Workstation.

While market participants expect the growth of on-line users to continue undeterred, and as data analytics, or ‘Big Data’, generally help drive more nuanced, user-specific shopping experiences, brick and mortar retailers have typically struggled and failed to compete with the digital momentum.

The activity may be reflected in the performance of certain retail-related exchange-trade funds, including industry disruptor ProShares Long Online/Short Stores ETF (NYSEARCA: CLIX), Proshares Decline of the Retail Store ETF (NYSEARCA: EMTY), as well as the Amplify Online Retail ETF (NASDAQ: IBUY).

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Over the past year, these funds – which primarily hold internet-related retailers such as Amazon.com (NASDAQ: AMZN), Netflix (NASDAQ: NFLX) and eBay (NASDAQ: EBAY) or short traditional brick and mortar shops such as L Brands (NYSE: LB) and TJX Cos (NYSE: TJX),  have returned roughly 13.5% (CLIX), 14.5% (IBUY) and 7.6% (EMTY), over the past year. 

Their growth has mostly outperformed the SPDR S&P Retail ETF (NYSEARCA: XRT), as well as the First Trust Nasdaq Retail ETF (NASDAQ: FTXD), which are more heavily weighted toward the non-internet retailer sector, with returns of 0.5% and 10.4% over the same one-year period, respectively.

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Macy’s Star-Strategy to Stoke Sales

In-store shopping experiences generally appear to lack enough entertainment stimulus, experienced staff and authentically engaging customer service needed to compete with the convenience and speed of digital check-out and delivery processes.

Some anecdotal evidence suggests that it is not unusual to find abandoned registers and skeletal staff with less-than-ideal product expertise roaming the floors among larger retailers such as Bed Bath & Beyond (NASDAQ: BBBY) and Macy’s.

In fact, the general lack of in-store enthusiasm is likely having an adverse impact on the Macy’s brand in general, as its third quarter of 2019 comparable sales fell 3.9% from the prior year, with adjusted earnings of US$0.07 per share down from US$0.27 over the same period.

To combat the store’s increasingly dismal sales performance and overall downbeat perception in the retail business, Macy’s recently said it has embarked upon an updated, three-year strategy – aptly titled ‘Polaris,’ likely as a nod to its iconic star-emblem branding.  

Macy’s CEO Jeff Gennette said that the company will focus its resources on “the healthy parts of our business, directly address the unhealthy parts of the business and explore new revenue streams,” with aims to stabilize margin in 2020 and “set the foundation for sustainable, profitable growth.”

The firm has identified several areas of improvement, including stepping-up the pace of its digital presence, restructuring its portfolio of properties and trialing new store formats, as well as upgrading its supply chain and shuffling some of its C-suite management.

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Among the more dramatic changes, Macy’s said it will close around 125 stores in lower-tier malls and cut roughly 9% of its workforce, or about 2,000 positions. Moreover, the firm will shutter its Cincinnati headquarters and select New York City as its sole base.

Through its Polaris strategy, the company expects to generate annual gross savings of around US$1.5bn, which it thinks will be fully realized by year-end 2022.

For 2020, the company anticipates gross savings of around US$600m, some of which it said will flow to the bottom line in order to stabilize operating margin.

Macy’s also anticipates its three-year plan will cost between US$450m-US$490m, most of which will hit its books in 2019.

Polaris Doesn’t Look Entirely Promising

Overall, Macy’s planned structural changes, combined with its already lackluster sales, seem to have spurred a pessimistic financial outlook through 2022.

While the company guided for FY 2019 net sales to come in at an estimated US$24.5bn, this figure is expected to drop to between US$23.6bn-US$23.9bn in fiscal 2020 and US$$23.2bn- US$$23.9bn in 2022.

Gimme Credit analyst Carol Levenson recently noted that Macy’s sales outlook “remains pretty grim even after all the new strategic initiatives.”

She continued that the company is “a good operator in a tough business, but activist investors have eyed its real estate portfolio greedily.” Its decision not to put its real estate into a real estate investment trust (REIT) “shows a prudent commitment to maintaining high credit quality, and it has been selling off some of its real estate,” Levenson said, adding that in the meantime, however, “sales visibility remains poor.”

Still, Macy’s turnaround efforts appear to have resonated with its stockholders, amid an intraday rise Wednesday of around 3.5%.

Shrinking Malls Impact Certain REITs

The anticipated trajectory of Macy’s sales performance and restructuring adds to other recent retail calamities, including once high-profile shops such as Barney’s, Forever 21, Gymboree, Diesel, Payless ShoeSource, Sears (OTCMKTS: SHLDQ), Kmart and Toys “R” Us – many of which have left massive gaps at shopping malls in their wake.

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According to McKinsey & Company, U.S. retailers in 2017 and 2018, alone, had vacated a quarter of a billion square feet, while continuing to announce thousands of additional store closures through 2019.

The empty retail spaces seem to have bled into the value of certain REITs such as Simon Property Group (NYSE: SPG) – which owns malls where store closures such as Forever 21 have been growing more frequent.

Shares of Simon Property Group have plunged by more than 28.4% from its latest 52-week peak set in mid-April 2019, before recovering marginally over the past two trading sessions. The stock was last priced at around US$138.63 intraday Wednesday, according to the IBKR Trader Workstation.

Meanwhile, investors will likely be paying attention to the retail space, with updated retail sales figures for January 2020 due out from the U.S. Census Bureau on Friday, February 14. Retailers’ earnings will also be eyed, with Macy’s Q4’19 and FY 2019 results slated for February 25.

Disclosure: Interactive Brokers

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Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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