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Macy’s: A New Chapter of Growth Ahead

Thomas Paulson
Mar 1, 2024
Macy’s: A New Chapter of Growth Ahead

Incoming Macy’s CEO Tony Spring introduced a new chapter in the department store's playbook this past week, starting with several “stronger calls to action” for 2024 and beyond. These include:

(1) Strengthening the Macy’s nameplate, including plans to close 150 underperforming Macy’s locations and increase investment in the 350 remaining locations to improve “shopping experiences, relevant assortments, and compelling value.” The closures will be done by 2027. As reported by WSJ, the Macy's Union Square location in San Francisco is part of the 150 closures. The plans also include rolling out 30 new Macy’s small format by the end of 2025.

(2) Accelerating luxury growth, including 15 new Bloomies stores and 30 Bluemercury locations.

(3) Simplifying/modernizing the operations, including selling store locations and underutilized distribution centers, thus raising around $700M and saving $235M in expenses (central, supply chain, fulfillment, and information technology).

All of this is a lot, making 2024 a “transition year”; as such, sales are not expected to grow given management’s focus on executing the transition, the merchandising team's focus on the repositioning, and operations’ focus on elevating the store service proposition. Beginning in 2025, management expects market share, sales, and profits to grow.

On the Macy’s brand, Spring noted, “Strengthening the Macy's nameplate should result in healthier sell-throughs and more productive stores, benefiting Macy's sales and margin profile and returning the nameplate to growth. The first step is to close and monetize underproductive locations so that we can prioritize the investments in stores that will lead us to a healthier future...We have conducted extensive internal and external analysis of our Macy's fleet center by center and market by market. We have compared value to operate versus value to close and looked at demand in each market to determine the right construct of stores and digital with a focus on being in the strongest centers. This is not a one-time exercise. Given rapidly shifting market dynamics and consumer preferences, it will be an always-on practice...We intend to fuel go-forward locations and our digital channels with curated and compelling assortments, have a better in-stock position, and appropriate investments to create a more welcoming environment and enhanced service...[These stores are] going to have additional staffing in important areas like women's shoes and women's ready-to-wear.”  We've highlighted the success of Abercrombie and Anthropologie in prior reports; one of the differences between these chains and Macy’s is their higher service levels. That strength/advantage would not have been missed by Macy’s management. Moreover, another significant part of Abercrombie’s turnaround was to shrink its footprint to allow for organizational focus and higher profitability– again their success would not have been missed by Macy’s management.)

On assortment, Spring said, “We want to have an assortment that offers a range and variety but doesn't have the level of redundancy. There's a level of SKU rationalization that we're going through to make sure that in every category, we are offering the customer something that we can both be in stock on and the size and color basis but offer them also compelling value and relevancy.” We’d expect the closures and the re-merchandising to be painful for some vendors; this will be a story later in the year and offer a clearer indicator of where Macy’s is going.


Source: Macy's Q4 2023 Presentation

The 150 store closures represent 25% of Macy's footprint, but only 10% of the sales. One can use Placer to identify the likely closures by looking at both venues ranked by visits and shopper frequency. Frequency was an important criterion for determining the 350 go-forward locations and 150 store closures. Additionally, to properly assess how Macy’s strategy and business are tracking, it will be necessary to isolate the 350 go-forward locations and ignore the 150 closures, which can be done in Placer. Also of note, for the remaining locations, Macy’s will create cohorts for the enhanced assortment and service, starting with 50 locations at first ("The First 50"). Criteria for the "First 50" stores include that they be representative of the go-forward geographic footprint, balanced across volume tiers, support strong vendor engagement, supported by more associates on the floor to support the customer, and focused on stronger merchandising and visual presentation. Traffic trends for these cohorts will shine light on how the go-forward 350 are likely to perform. At this time, we do not know which locations are the first 50.

In choosing the go-forward 350 from the 150, Spring said, “The team spent the greater part of 6-7 months doing a complete diagnostic on our entire portfolio looking at demographic, psychographics, digital demand, the condition of the center, the condition of our store, capital required to bring the stores to standard...We made a decision on our go-forward fleet that was far more comprehensive than it would have been in the past. So I feel good about the go-forward fleet”.  

Spring also discussed the store closures in the context of digital demand recapture, “[W]e have stores in these markets beyond the stores we're closing. Not every market, but most markets. We'll be looking at neighboring stores to capture that demand as well as digital outreach to make sure that we lose as little as possible.” This comment should help one to triangulate on the 150 store closures. However, the neighboring store may be one of the new 30 small-format stores.

As it relates to its fiscal Q4 2023 results, banner Macy’s reported a -4.7% decline in comparable-store sales, Bloomingdales a -1.6% decline, and Bluemercury a +2.3% gain. The go-forward 350 stores saw slightly positive comparable store sales. Company-wide gross margins were much improved at 37.5% and close to pre-pandemic levels. Profitability and cash generation were solid. The Macy’s banner outperformed expectations and Dillard’s, as we had previewed. The comp versus 2019 was little changed from Q4 2023 for both Macy’s and Bloomingdale’s.

Placer traffic for the banner was -7% for Q4 2023, an improvement of +460 basis points quarter-over-quarter but also including a -14% decline in January due to the bad weather. November and December, where the volume is, were down only -5% and -4%, respectively. The difference between sales (-4.7%) and traffic (-7%) is higher average ticket size (+5.5%), conversion rate, and product / customer mix (more affluent, less non-affluent). Traffic for Bloomingdale’s for November and December was down by only -2%; Bloomingdale’s benefits from its higher exposure to the affluent. Placer data shows that Nordstrom performed roughly in line with Macy's for November and December.

Dillard’s reported a -5% decline in comparable store sales and 110 basis points of gross margin compression, with the release reading, “A continued challenging sales environment during the fourth quarter. Cosmetics was the strongest performing category followed by home and furniture. Juniors’ and children’s apparel was the weakest category followed by ladies’ accessories and lingerie and ladies’ apparel.” The category callouts were similar to Q3 2023. The margin pressure was felt in juniors’ and children’s apparel and men’s apparel and accessories. Broadly speaking, children’s as a category has been challenged as evidenced by Children’s Place, where Q4 2023 profits are to be around a -$50M loss and the company has needed to take action to needed to take action to strengthen its liquidity and balance sheet to stave off vendors cutting shipments. Likewise, Carter’s reported a -9% decline for its U.S. retail business.

As shown in the comparable-store sales table above, Dillard’s comps were similar to last quarter, but the trend compared to 2019 was lower. Placer shows traffic down -7.9%, and while that was an improvement quarter-over-quarter, the abatement was less than that at Macy’s. Lower reported gross margins and inventory imply that Dillard’s increased promotions and clearance activity to move through goods to end clean.

Does Dillard’s borrow Macy’s playbook? That is unlikely in our view because: (1) Macy's has had activist investor pressure; whereas Dillard’s is controlled by the Dillard family (two-thirds of voting shares); (2) Macy’s 2023 EBITDA is around 80% of the pre-pandemic level, while Dillard’s is 50% higher; and (3) Macy’s stock price is down 28% from the end of 2018, Dillard’s is 720% higher. However, studying Dillard’s allows for some perspective on how Macy’s next chapter might read. We lay out the unit revenue figures in the table below.

The Macy’s 350 go-forward will be larger on average than the Dillard’s average; moreover, Macy's sales per square foot is more than two times Dillard's. Said differently, Macy’s 350 stores have higher-producing real estate than Dillard’s, making it substantially more important to vendors on a relative basis. An importance that can be captured/monetized from vendors in the form of more product exclusives, higher levels of beauty counter service, more marketplace commitment (SKUs), and more retail media advertising. These in turn will show up in increased market share, revenue, and profits.

Many view the department store industry and business model as a “melting ice cube”. Dillard’s has not been an ice cube, but a cash-generation machine. For 2023, Dillard’s EBITDA margin was 16.2% compared to Macy’s 9.7%. Dillard’s has very little in lease/rent expense, which explains 160 basis points of the difference; adjusting for that to make a better apples-to-apples comparison puts Dillard’s adjusted margin at 14.6%. For Macy’s, the $235M in simplification savings and the mix impacts from closing the 150 stores yields an additional +260 basis points, lifting its margin figure to 12.3%. That still leaves 230 basis points of difference, and it doesn’t capture Macy’s superior ability to drive more marketplace and ad revenue. Some of the 230 basis points (plus revenue potential) will be re-invested to support increased service levels, but that still leaves potential for more rate improvement (from the 12.3% level) and it should result in more market share and sales leverage. To summarize, for Macy’s there is a legitimate benchmark and path to a much higher cash-generating business.

The charts below show the distribution of the two brands’ store visitation trends between volume and performance compared to 2019. Our observations are: (1) Dillard’s has a lower coefficient of variation in percentage change compared to 2019, which implies fewer extreme outliers. This suggests Macy’s has opportunity to better assort to individual markets (customers and geography), something that Dillard’s has done well; (2) The upward slope and higher average change for Macy’s suggests better-performing locations in visits stability/volume (i.e., the 350 go-forward stores are better than the general observer can appreciate); (3) On average, Macy’s produces 90% more visits than a Dillard’s location (i.e., they are relevant to more consumers and of more importance to vendors); and (4) for Macy’s, the bottom-left cluster of stores has many (circled in red), whereas, outside of that circle are a lot of high-volume locations that have better-than-average and better-than-Dillard’s performance to 2019. To conclude, it's going to be an exciting next chapter for Macy’s and well worth paying attention to.

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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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