As the 2Q22 reporting period winds down, what expectations should CRE executives have about retailer inventory positions and the health of the consumer? For answers, we turn to the department store channel. Macy’s reported and guided better-than-feared results where store traffic softened and clearance activity increased (Thus far in 3Q22, comparable-store sales are tracking at low-single-digits declines.) Macy's clearance activity will increase to clear aged inventory in seasonal goods, private brand merchandise and pandemic-related categories, such as active, casual sportswear, sleepwear, and soft home. That activity, combined with similar actions by Target, Walmart, and others will put pressure on pure-play retailers such as Old Navy, Bed Bath & Beyond, and others in 2H22. Less-affluent customers are pulling back purchases, which was the biggest change for Nordstrom and Nordstrom Rack. The pull-back was engagement and traffic; there was no sign of trade-down with CEO Erik Nordstrom saying, "We have not seen a lot of evidence of trade down. As I mentioned earlier, clearance has actually been a real soft part of our inventory...[W]e're not seeing customers looking really driven by price as the main driver. What we're seeing from our customers is they want what they want. They want newness. And lowering prices on what didn't sell at regular price is tougher. It's taking more markdowns to clear out older products [than we normally would]. So no signs of trade-down." This to us reads that the slowdown is the result of Nordstrom’s customer having shifted attention and spending to other categories, be it spending more on necessities given inflation or taking a vacation in Europe.
In describing the state of the consumer Macy’s CEO Jeff Gennette said, “Macy's brand customers across all income tiers slowed and shifted their spend. Persistently high inflation drove higher prices in food and fuel and in turn, led to higher interest rates in the softening market…Constrained consumer spend also shifted from goods to services, with more consumers choosing to spend on vacations, events, and dining out. Despite the weakened environment, for Macy's, we continued to see strength in occasion-based categories, which include career and tailored sportswear, fragrances, shoes, dresses and luggage. Sales for these categories were up 8% to second quarter of 2021 and up 21% to second quarter of 2019. Like last quarter, pandemic-related categories, which include active, casual, sportswear, sleepwear and soft home continued to decelerate during the quarter, with sales down 18% compared to the second quarter of 2021 and down 12% compared to the second quarter of 2019...Spending patterns for Mother's Day and Father's Day were encouraging, signifying that, despite inflationary pressures, customers continue to shop Macy's for celebrating life's moments with family, friends and coworkers. Leading up to Mother's Day, we saw strength in beauty, dresses, career, sportswear and women's shoes. Before Father's Day, we saw strength in men's fragrances, tailored clothing, furnishings, outdoor sportswear and shoes. Combined with the two weeks leading up to both holidays, these categories were up 9% over the prior year...[W]e're not really seeing evidence yet of trade down going on between different buckets of income levels, what we saw was differences in engagement...[In the categories that are meeting consumer needs,] the average unit retail (AUR) was up about 13%. And you just got real standouts--you've got men's clothing AUR that was up 29%. Missy-career, which would be the equivalent of suiting and wear-to-work, was up 20%. Luggage was up 20%. We expect those AURs to continue."
We offer additional takeaways for Macy's and Nordstrom below.
Key Macy's Metrics
- Macy's physical retail comparable-store sales were roughly even, driven by a higher average unit retail and higher conversion rate offset by lower traffic. Overall Macy's brand comparable store sales are slightly above 2019 due to higher average ticket.
- Bloomingdale’s physical retail comparable-store sales increased approximately +6% driven by higher conversion rate. Overall brand comparable-store sales are +6% above 2019 levels, again due to a higher average ticket. Women’s, men’s and kid’s contemporary and dressy apparel were noted as top categories.
- Placer.ai visitation data (below) indicates that trends for Macy's were pretty consistent across the nation, Texas a little worse, California and Florida a bit better. Bloomingdale's was consistently better than Macy's.
- Trailing-twelve-month (TTM) sales per square foot declined $0.35 to $222 and will likely be down low-single-digits over the next year.
- Profitability declined due to higher clearance activity, transport costs, and wage costs. Additionally, store and distribution center compensation and other wage increases are ongoing. Inventory was up a more modest +7% versus Kohl’s, Target and others. Cleaner inventory positions Macy’s well for having a fresh assortment for the holiday season.
- TTM EBITDA and free cash flow were $2.9B and $1.5B, respectively, representing an excellent 50% conversion ratio (and up meaningfully from $2.1B and $0.8B in 2Q19). However, with lower sales both are likely to move down by mid-single-digits over the next year.
- Macy's announced that the Toys "R" Us partnership will expand to every Macy's location by the holidays. However, there was little update on future plans for Market by Macy’s and Backstage as management noted that they are still tinkering with the small format model, but they did share that there would be more Market by Macy’s in 2023.
Key Nordstrom Metrics
- While Nordstrom’s 2Q22 update demonstrated good YoY sales and earnings growth, the company was still lapping declines versus 2019 in the 2021-base period. Moreover, the underlying trend decelerated compared to 2019. Additionally, management lowered their 2H22 outlook for sales and profits, with CEO Erik Nordstrom saying, “We delivered these results despite customer demand decelerating significantly in late June predominantly at Nordstrom Rack and in our lowest income customer cohorts. Though second quarter was consistent with our previous guidance, we are updating our outlook for the balance of the year to reflect the softening trends and actions we are taking to reduce our inventory levels."
- Nordstrom went on to say, “Compared to the first 2 months of the quarter, July sales decelerated 9 percentage points in the Rack banner. Across both banners, the softening trend was more significant in customer segments with the lowest income profiles, while we saw greater resilience in the higher income segments. For example, in the Nordstrom banner, items with lower AURs underperformed higher AURs. Within our designer business, higher-priced luxury products significantly outperformed lower-priced product." The trend is evident in Placer.ai as shown below and which mirrors Macy’s as shown above. As a reminder, the Nordstrom brand is heavily weighted to California (28 of its 114 locations).
- The full-price Nordstrom brand’s TTM sales per square foot increased $19 QoQ to $561. President and Chief Brand Officer Pete Nordstrom shared, “Both our shoes and beauty categories also had double-digit growth this quarter with shoes performing well across dressy and casual styles...Designer also posted double-digit growth, although growth trends decelerated...However, private label product underperformed, leaving us with a portion of that inventory to clear in the third quarter...We are disappointed in the performance of our private label product. We have brought in new leadership and are resetting our strategy to deliver more compelling product."
- Nordstrom Rack's TTM sales per square foot increased $10 to $556. Pete Nordstrom said, "We are clearing through lower-price-point items at Nordstrom Rack to make room for the premium brands at great prices that drive the Rack business." We estimate that all of the sales per square foot increase was driven by high AUR and that traffic was down strongly.
- While profitability increased in the quarter, it will decline in 2H22 due to the increase in clearance actions and fixed cost deleverage. Management expects EBITDA margins for the year to be just above 9%.
- TTM EBITDA and free cash flow of $1.3B and $42M, respectfully, are meaningfully lower than $1.4B and $529M in 2Q19 and likely to decrease in the high-single-digits over the next year.
