M - Macy's: Business As Usual

2023-07-22 03:46:31 ET

Summary

• Macy's has struggled with declining revenues and a negative return to shareholders over the last ten years.
• The company's recently announced the departure of CEO Jeff Gennette in 2024.
• In our opinion, the future of the company remains uncertain due to the competitive environment and lack of a clear competitive edge beyond brand recognition.

Background

There are some institutions and events in the lives of American that resonate on a deep cultural level: apple pie, the World Series and Super Bowl, the Macy's Thanksgiving Day Parade. Since 1830, Macy's (M) has grown into something of a staple of American life, though it has become in the past twenty years ago an arguable shadow of its former self. The transition of consumer habits from in-store, mall-centric shopping, to online shopping (primarily from the ascendancy of Amazon (AMZN)), has been difficult for Macy's.

Over the last ten years, quarterly revenue outside of the more traditionally busy holiday-heavy fourth quarter has been in slow decline, as can be seen in the chart above.

The stock has languished as well. On a total return basis (which includes dividends), Macy's stock has delivered a negative 51% return to shareholders, while the broader S&P 500 (SPY) has returned north of 200%.

Macy's management has not taken the transition in consumer behavior lying down, however. The company is actively closing underperforming stores , and has implemented a turnaround plan known as Polaris, which then-and-still CEO Jeff Gennette announced to the world in May 2020 . At the time, the plan was supposed to take three years to execute. Today we'll take a look at the current state of affairs at Macy's and see if brighter days ahead can reasonably be expected.

Let's dive in.

Multiple Challenges

The present challenges facing Macy's are multifold, even putting aside the ever-present question of Amazon. To start, the company stocks brand-name items that resonate with consumers, and which, prior to the online shopping, could largely only be found at in-person retailers such as Macy's.

The advent of online stores and direct-to-consumer sales from manufacturers has had the effect of an end-run around middlemen retails like Macy's, JCPenney, and Nordstrom (JWN). After all, why sell to a retailer when you can sell directly to the consumer and keep the fat margin for yourself?

Traditional mall-centric retailers have also felt the squeeze from discount retailers such as TX Maxx (TJX) and Ross (ROST), where consumers can often find many of the same brands that they would find at traditional retailers.

To this end, Macy's most recent quarterly numbers were a disappointment from a year-over-year perspective.

The company saw quarterly net sales drop 6.8% year over year, while other revenue and net credit card revenue were down 12% and 15.2% respectively. The media network segment, which according to the company's late st 10-Q is defined as "an in-house media platform supporting both Macy's and Bloomingdale's customers through a broad variety of advertising formats running both on owned and operated platforms as well as offsite," was the only bright spot with 11.5% growth, though the total revenue derived from it is only a small percentage of revenue overall.

Contrast this, then, with TJ Maxx's quarterly results for the period ending April 29, 2023, where net sales came in plus 3%.

On the conference call for the first quarter , management discussed macroeconomic headwinds as the primary contributor to the decline in sales, with Gennette noting that the decline within the Macy's brand was "the most pronounced".

However, Gennette pointed out that the Backstage brand (which retailers lower and discount price points similar to TJ Maxx and Ross)

"outperformed the full-line locations in which they operate by approximately 150 basis points on a comp owned plus licensed sales basis. These locations benefited from a greater emphasis on seasonless product and a strong value proposition."

While macroeconomic headwinds are likely to have played a part in Macy's overall underperformance at its mall-centric location, the outperformance of its TX Maxx-like retail brand and Gennette's final point of value proposition plays, we think, a larger role that we would like to see the company tackle head on.

Assessing Polaris & The Leadership Future

As previously mentioned, Polaris was Macy's attempt to re-invigorate the brand and announced in 2020. In the Q1 2023 10Q filing, however, no mention of Polaris is made, which is the first time the plan has been absent in mention for at least the last 13 consecutive quarterly or annual filings. The company has published no update or conclusive report on the success or failure of the Polaris plan (which is not uncommon for these sorts of initiatives).

In the Company Strategy section of the most recent 10K filing , however, the company gives an outline as to the pillars of the plan itself. One of the pillars, we note, is Deliver Clear Value , something which is admittedly difficult to measure, but something which, based on the most recent quarterly and overall flat sales results, appears to be something which may not be resonating with consumers.

Given its absence from the latest quarterly filing, we may then conclude that Polaris is coming to an end for the company, which is fitting as in March of this year the company announced that Gennette would be stepping away from Macy's in 2024, and that Tony Spring--currently a Macy's executive vice president and Chairman of Bloomingdale's--would be taking the helm.

As an insider, the selection is good in that the incoming CEO is familiar with the company, its operations, and can provide a degree of continuity for the company that is valuable. On the other hand, investors may be wondering if intimate familiarity and continuity is what the company needs at this point, and if whether an outside hire would perhaps be a better fit to re-invigorate the venerable brand.

The Bottom Line

With a succession plan in place that brings a company insider into the CEO seat, we are unsure about the prospects for true change at the company. Of course, every management team is different and Mr. Spring may very well prove to be a leader capable to lifting the brand to its former self--but only time will tell.

Given the competitive environment and seeming lack of a competitive edge aside from brand name recognition, we remain on the sidelines with Macy's for now.

For further details see: