Analysis: One of Macy’s biggest problems is ‘terrible’ store environment

The latest set of results from Macy’s do not paint a picture of an innovative company forging ahead. Rather, they point to a business that is surviving but is still a long way from thriving. In our view, the virtually flat comparable sales numbers and the slip in net income are far from positive, especially in a market where trading is still reasonably solid. They send out a clear signal that Macy’s must do more not only to revive current performance but also to secure its long-term future.

Macy’s will, of course, make much of the fact it has steadied the ship in terms of comparable sales, and we concur that a 0.2% increase is better than the regular declines the company was posting some years ago. However, these anemic results come with quite a few caveats. First, they come off the back of a very weak outcome in the prior year, which gives the sense that over the past 12 months Macy’s has not really advanced. Second, they underline the fact that Macy’s continues to lose market share at a fairly rapid pace. Third, as the comparable numbers include the growing online channel, they indicate that sales at physical stores continue to shrink.

None of this is to suggest that Macy’s has been completely inactive. On the contrary, the company has a number of strategies in play, including the development of the Story business and the opening of more off-price Backstage stores. However, in our opinion, these things all represent tinkering at the edges. They do not address the fundamental issues at the heart of the business; problems which have been festering for years and which Macy’s always seems unwilling or unable to resolve.

The central issue is the terrible environment in many of Macy’s regional shops. These stores, which have suffered years of underinvestment, increasingly resemble 1980s throwbacks – and not in a trendy retro way. Admittedly, it would be hard for Macy’s to revitalize all of these stores via extensive capital investment, but some of the issues can be resolved by ensuring basic shop keeping standards – cleanliness, layout, neatness – are up to scratch. Macy’s all too often fails on these basic retail disciplines and the ultimate impact is declining footfall and a loss of share within its trade areas.

Simple store investments to elevate high-growth categories like beauty are vital. Macy’s is increasingly coming up against players like Ulta in regional markets and is losing share. In our view, it is just not satisfactory to sit idly by and allow this to happen without defending the business – which is increasingly what Macy’s appears to do.

A further issue is the failure to develop more compelling own brands, especially in apparel and home furnishings. Macy’s is way behind the curve on this and, as a result, lacks the ability to create clear points of product differentiation with rivals and to achieve margin gains from own-label merchandise.

One area where Macy’s has achieved some success is in the development of its off-price Backstage business, which is now being rolled out to more stores. While we have no doubt that this helps to lift the overall productivity of failing shops it does not represent a viable long-term solution for those spaces. All of our data suggests that the presence of a Backstage does virtually nothing to pull the rest of the store into meaningful growth.

In short, Macy’s is keeping its head above water. However, if this is the best performance it can muster during a benign period, we have major concerns about how it will fare if, and when, the economy takes a turn for the worse.