Reprint from Investopedia
When a retailer closes stores, it’s sometimes difficult for investors to make sense of the situation. An optimist will say that store closings will cut costs, which will free up capital that can then be used in stronger growth areas of the company. A pessimist will say that those store closings are an indication that the retailer is struggling. In this case, both the optimist and pessimist are correct. Fortunately, it’s relatively easy to read the Macy’s Inc. (M) situation and where the company is heading.
Ahead of the Curve
Macy’s CEO Terry J. Lundgren was well ahead of the curve with omni-channel, which pertains to the combination of brick and mortar, online and mobile shopping. For Macy’s, it’s the concept of allowing consumers to shop “Wherever, Whenever, and However They Want.” By being ahead of the curve on omni-channel compared to other department stores, Macy’s devastated much of its direct competition and gained significant market share. (For more, see: Macy's Closing 35 to 40 Stores)
While Lundgren might be taking some heat for lackluster performance in recent months, he’s likely to be the best leader to guide Macy’s through a challenging time. Macy’s is going to have to contend with many headwinds, including a strong U.S. dollar and a hesitant consumer, especially when it comes to the merchandise Macy’s sells. For instance, on the second-quarter conference call, CFO Karen Hoguet made the following comment: “The overall growth in the economy is modest at best and we are seeing customers gravitating to restaurants, recreational services, healthcare and electronics, rather than to traditional general merchandise, apparel, and furnishing categories.”
Once again, Lundgren is making the right move by opening Macy’s Backstage, which is an off-price retail outlet that will offer 20%-80% off department store prices. This will pit Macy’s up against TJX Companies (TJX), Ross Stores Inc. (ROST), and Nordstrom Rack (JWN). However, Macy’s Backstage is adding a twist to make it unique, which includes mobile checkout, juice bars, free Wi-Fi, and a Macy’s Taste Bar Café in the Brooklyn location, which will sell salads, soups, sandwiches, as well as beer and wine. Additionally, Macy’s is offering same-day delivery in some cities in order to compete with Amazon.com Inc. (AMZN).
What to Expect Going Forward
In the second quarter, net sales slipped 2.6% year over year. Comps also declined 1.5%. However, net income improved 3.6%. For fiscal year 2015, net sales guidance was reduced to a 1% decline versus an earlier expectation of +1%. Comps are now expected to be flat versus an earlier expectation of +2%. (These obviously aren’t positive numbers. Impatient investors will demand an immediate turnaround, but the consumer environment and strong U.S. dollar simply will not allow for such a possibility. Put simply, external events will hamper Macy’s growth potential in the near term. This will likely lead to a depreciating stock price. However, while it might be difficult to see, Lundgren is very likely to be the right leader to help navigate Macy’s through these headwinds, which should strengthen over the next several years. When the smoke eventually clears, Macy’s will have put itself in all the right spots to succeed.
The Bottom Line
If you’re evaluating Macy’s as an underlying company, it should remain a long-term winner. If you’re evaluating M, as in the stock, there could be some pain ahead, but this is primarily due to external events. Upper management is making all the right moves for the future. If you’re not in M, then consider waiting for cheaper prices in the future, but please base any investment decisions on your own research. As far as store closings go, these are the types of difficult moves that need to be made for long-term success. (For more, see: Is Macy's Next to Monetize Its Real Estate?)
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