<span style="color: #9e9e9e;">Macy’s Inc. was seeing weekly improvements in its in-store sales when their stores reopened, but the improvement has “modulated” with in-store sales now running down about 35 percent. Given also the uncertainties around the coronavirus, the department store giant now foresees sales following the trend in the back half of the year.
The conservative outlook comes after Macy’s last month indicated that initial sales had been higher than the company had modeled. Digital sales have also remained strong in each market as stores reopened.
On its first-quarter conference call with analysts, Jeff Gennette, chairman and CEO, cited three factors in its cautious outlook.
First, he noted that COVID-19 is “still in full swing” in some parts of the country. While Macy’s is not expecting another national shutdown, the guidance expects periodic regional “flare-ups” as consumers are encouraged to stay home. Gennette said, “Most of our stores are currently on reduced hours, and we’ll remain flexible to meet demand.”
He said the health and safety of customers remains a priority, and the company has a resurgent game plan in place to guide temporary closings, whether its a single store or a regional group of stores.
Second, Gennette said that while all but six of Macy’s stores have reopened, many of the malls in which Macy’s operates are closed or have been re-closed in areas where COVID-19 has undergone a resurgence. In the malls that are open, many other stores and services remain closed and that has impacted traffic.
Third, Macy’s is seeing its large urban and flagship stores opening more slowly than stores opened earlier in rural areas. Gennette said these stores are located in densely populated urban areas that were most affected by the pandemic. They also were impacted by the “virtual disappearance” of spending from international tourism which the retailer does not expect to return anytime soon.
The lack of international shoppers is estimated to have had a 50 basis point impact on first-quarter comps. Before COVID-19, international tourism was estimated to have accounted for just over 4 percent of sales.
On the positive side, online sales have shown a “very strong performance” since stores first closed and are expected to expand at a “healthy double-digit” rate through the back half of the year. Said Gennette, “By all metrics, sales, traffic, conversion, mobile engagement, and new customer acquisition, we’re pleased with the results of our digital business. And it’s encouraging to see that the newly acquired customers coming into the brand through dot.com are younger and more diverse than our core customer. We’re working hard at strategies to retain these new customers and, over time, convert into Omni-shoppers, which are our most valuable customers.”
<span style="color: #9e9e9e;">Among categories, beauty, furniture and soft home sales have been strong online. Macy’s also sees improvement across all areas of business including ready-to-wear.
In the first quarter ended May 2, sales reached $3.02 billion, down 45.2 percent year-over-year. The decline reflects the closing of its stores nationwide starting on March 18. The results were in line with the guidance given on June 9.
Macy’s reported a net loss of $3.58 billion, or $11.53, against earnings of $136 million, or 44 cents, a year ago. Earnings (loss) before interest, taxes, depreciation, and amortization (EBITDA) showed a loss of $3.87 billion against income of $446 million.
On an adjusted basis, net income was a loss of $630 million, or $2.03, against earnings of $137 million, or 44 cents, a year ago. The results were in line with the guidance given on June 9. Adjusted EBITDA was a loss of $689 million against earnings of $447 million.
Adjusted results in the latest period exclude the pre-tax impact of the non-cash goodwill and long-lived asset impairment charges tied to COVID-19 of $3.1 billion and $80 million, respectively, as well as the related tax impact. Adjusted results also include the benefit of tax law changes resulting from the CARES Act.
Gross margins in the quarter eroded to 17.1 percent from 38.2 percent. The margin decline included an approximately $300 million inventory writedown, primarily on fashion merchandise.
Selling, general and administrative expenses increased to 52.9 percent of sales from 38.4 percent in the same quarter a year ago. The erosion was due to sales deleverage. SG&A expenses overall declined 24.3 percent to $1.6 billion in part due to savings from employee furloughs.
On June 29, Macy’s announced a restructuring to align costs with anticipated near-term sales as the business recovers from the COVID-19 impact. The restructuring will reduce headcount by approximately 3,900 corporate employees, and it’s expected to generate expense savings of $365 million in fiscal 2020 and $630 million on an annualized basis.
On the call, Felicia Williams, interim CFO, said the savings are entirely due to the headcount reductions that ran across corporate and management areas, as well as in stores, its call center and distribution. She added, “If the business recovers to levels above our expectations, we will be in a position to layer in additional headcount, but for the near term, we are planning these as permanent reductions to our cost base.”
These savings will be additive to the anticipated $1.5 billion in annual expense savings as part of its Polaris program announced in February, which the company expects to fully realize by year-end 2022. For fiscal 2020, the company expects pre-tax costs of $180 million for the restructuring activities, the majority of which will be recorded in the second quarter and all of which will be in cash.
<span style="color: #9e9e9e;">Looking ahead, sales are expected to improve sequentially throughout the year. Same-store sales in the second quarter are expected to improve roughly 6-to-7 percentage points versus in the first quarter as in-store declines offset online strength. In the third and fourth quarters, total comps were expected to be down in the low- to mid-twenties range.
Online sales saw a low-single-digit decline in the first quarter, but growth accelerated with store closures. Macy’s expects to deliver online growth in the high-teens for the fall season “as customers continue to shift to online as the pandemic continues,” said Williams. For the full year, the company is projecting a low- to mid-teens increase in digital sales.
As a percentage of sales, online represented 43 percent in the first quarter and is expected to average in the mid-forties for the year.
Gross margins are now expected to improve in the second quarter versus first-quarter levels with further improvement seen in the following quarters. Inventories were down 10.4 percent at the quarter’s end to $4.9 billion from $5.2 billion a year ago due to the inventory write-down and aggressive clearance efforts. Williams said, “We are well-positioned from an inventory perspective for the back half of the year, and we plan to end the third quarter in a clean inventory position. We’ve been committed to clearing our spring seasonal inventory, and we’ve seen strong sell-throughs on our clearance merchandise.”
Photos courtesy Macy’s
