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Department Stores: How Credit Clipped Macy’s

Thomas Paulson
Aug 25, 2023
Department Stores: How Credit Clipped Macy’s

As Macy’s management had expected and planned for, Q2 2023 was a difficult quarter. Moreover, as we feared last spring, delinquencies and losses built for its credit card portfolio. Combined, these led to a decline in profits from $371M to $124M. As the soft environment was expected, Macy’s held their inventories, AUR, and merchandise margin at healthy levels. As we have written all year, this year “value & thrift” was going to gain market share; last week, we wrote about the excellent traffic and strong back-to-school start for TJX and Ross. Brand Macy’s did experience a slight improvement in traffic during July and early August, from May, but overall, the results are still down.

On the quarter and deft execution in what was a soft environment, CEO Jeff Gennette noted, “Promotional sell-throughs were better than expected and clearance markdowns were not as deep, thanks to our cross-functional teams for being nimble, flexible and embracing new ways of working. Entering the third quarter, store floors and online are less cluttered and easier to navigate. Content is fresh and seasonally appropriate with open-to-buy and the ability-to-chase into areas of strength, all of which improves the omnichannel shopping experience.”

Outperforming categories for the Macy’s brand included beauty (particularly fragrances), women’s career, men’s tailored, and Backstage–possibly helped by improved back-to-the-office trends. Bloomingdale’s outperformers included beauty, women’s contemporary & designer, shoes, and outlet locations. Bluemercury’s comps increased +5.8%. Looking at the comparision between traffic and transaction dynamics, it is surprising that Macy’s conversion rate fell (versus a  meaningful increase at Dillard’s). By contrast, Bloomindale’s conversion improved. Gennette noted, “Over the last several quarters, we have seen the Macy's customer more aggressively pulled back on spend in our discretionary categories. They are not converting as easily and becoming more intentional on the allocation of their disposable income, with an ongoing shift to services and experiences...”  

Incoming CEO Tony Spring said, “At Bloomingdale's, we continue to optimize our relationship with our customers and elevate our luxury shopping experience. On a trailing 12-month basis, our top of the list loyalty customer base grew in both count and spend. We know this customer loves the Bloomingdale's shopping experience, and we have remodeled the Bloomingdale's doors with larger concentration of luxury brands and products. Improvements have focused on areas with higher luxury goods penetration, including beauty, fragrances, shoes, handbags and fine jewelry.” Gennette, “At Bloomingdale's, this holiday season, we are partnering with many of our luxury brands to introduce high-touch, unique experiences, events and pop-ups curated around the interests and shopping patterns of our best customers. These activations have been designed to create animation and inspiration in our stores and strengthen our client relationships.”  Spring also noted, “At Macy's Beauty, we're expanding our luxury offering with a net business on newness, freshness in our core market brands and in-store service. As we prepare for the holiday, we will lean into our leading fragrance positioning across our omnichannel shopping.”

On new small-format locations, Spring noted, “Our second growth vector is small store format. We are pleased with the performance of our 10 small-format locations, which include 8 Macy's and 2 Bloomie's. Macy's and Bloomie's stores that have been opened over a year had a positive comparable owned plus licensed sales growth. Last weekend, we opened our 9th small format Macy's just outside the Chicagoland area in Indiana. And in September, we'll open two more, one will be in Las Vegas and the other will be in Boston, which is our first smaller format in the Northeast. In November, we will open a location in San Diego. Bloomingdale's is also adding to its small format portfolio, with plans to open a third location in November. The store will be located in Seattle, which is a new brick-and-mortar market for the brand.”

CFO and COO Adrian Mitchell shared, “[W]hat we look at is the financial trends of the business. And so for stores that are comped, we're seeing healthy year-over-year growth in this portfolio, and we're getting better. We see lots of opportunity around product, around how we engage customers in the local market. But even in spite of our learning experience, we continue to see growth in stores that are actually comping...[W]e're excited about is the potential that's ahead. When we think about where customers are, where we can invest, we see a portfolio of healthy big box stores where we will continue to invest complemented by a large number of small format stores.”

On the company's second-half outlook, Mitchell said, “To level set, we continue to have a cautious view on the consumer. In addition to the headwinds discussed on prior earnings calls, the expiration of student loan forgiveness beginning in October, higher interest rate levels, and lower new job creation are all new pressures on the consumer. While we had contemplated these factors when providing an annual outlook on our last earnings call, it is still unknown how consumers will respond to them, especially after so many months of increased pressures. As such, we believe it is prudent to maintain our cautious view on the consumer and their capacity to spend on the discretionary categories we sell.” Beyond the near term, Spring said, “I think the growth opportunity for the Macy's brand requires us to dig deeper into the assortments and making sure that we eliminate redundancy, and we improve variety, making sure that people find the brands they're looking for as well as the level of exclusivity that comes from our private brand assortment. And the final piece I would say is the team is highly focused on improving the customer experience, physically and digitally, doing those things that are necessary to create a more seamless and easier omnichannel experience.”

Another factor for Dillard’s versus Macy’s sales results is Macy’s greater reliance on its credit extensions to its customer through its credit card program and the provider. Nearly half of Macy’s sales utilize that offering, which is roughly 2.5x larger than Dillard’s. Additionally, Macy’s service provider is Citibank whereas Dillard's is Wells Fargo. Below we show the demographics of visitors to both brands. As shown, Macy’s has a greater mix of affluent households (18% of visits); its sales to these households will be far greater than 18% given that these households spend more per visit. Similarly, its sales to households below $75K will be far less than 53%. Nevertheless, despite Dillard's having a less affluent customer mix than Macy’s, it reported flat year-over-year credit revenue. Macy’s by contrast, experienced a -41% decline. Accompanying that would have been a tightening of credit lines to many of its Star households, which would impact sales. Kohl’s, by contrast, has a larger exposure to credit than Macy’s. Kohl’s service provider is Capital One. Kohl’s credit revenue was even with sales and their qualitative description of delinquency and loss trends didn’t sound too dissimilar to Macy’s. Thus, Citibank could be acting differently (i.e., more conservatively) than Wells Fargo and Capital One, or someone involved wasn’t giving things enough attention.

On the credit topic, Mitchell said, “Credit card revenues are predominantly driven by the level and health of sales and receivables generated from our proprietary and co-brand credit cards. While we have seen an increase in revenues as interest rates have risen, that has been more than offset by higher bad debt assumptions and write-offs. These bad debt assumptions and write-offs are the result of rising delinquencies, which leads to higher net credit losses over time and contributes to increased bad debt within the portfolio. We are working closely with our bank partner, Citibank, to mitigate the rising bad debt by adjusting underwriting strategies.” Also of note, Nordstrom shared that its delinquencies had recently risen to levels higher than pre-pandemic.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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