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Analysis: Turning around Macy’s not for the faint of heart


The first set of results under Macy's new CEO, Jeff Gennette, are not good. Indeed, they are decidedly gloomy and represent a significant deterioration over recent quarters. That this worsening comes off the back of feeble prior year numbers - when comparables fell by 6.1% and net income by 40.4% - only adds to the sense that Macy's is on a slippery slope.

None of this is a reflection on Mr. Gennette, who has been at the helm for a very short while, but they do underscore the scale of the challenge he now faces. Turning around Macy's is not a venture for the faint of heart.

To be fair, Macy's seems to be embracing this change and is actively trying to reinvent and modernize the business with an energy that was simply not present a couple of years ago. It has also recognized that painful steps -- like the shuttering of underperforming stores -- are necessary for longer-term survival.

Some of these steps are already in play. The program of store closures is proceeding, which is one of the reasons why total sales - though not comparable sales -- have edged down at a faster pace. Longer term, the cutting away of less profitable and unprofitable stores will aid the bottom line, although there has been no real benefit during this quarter. The property disposals will also inject cash into the business which Macy's can use to refurbish existing stores.

As prudent as the re-engineering of the store fleet is, Macy's main problems are centered on issues of product and store environment. On both fronts, there has been very little movement. Indeed, inventory levels this quarter were far too high, resulting in continued sharp levels of discounting and rather cluttered shop-floors. Against this backdrop, customer traffic and conversion rates continued to fall at pace.

Macy's has made modest progress in certain categories like women's shoes -- where it has moved some stores to an open-sell self-serve model, and home -- where it has revamped and expanded the department in some stores. It is now starting to focus on beauty, with the aim of making its traditional beauty halls more open, allowing customers to pick products for themselves, and introducing more beauty services. These are all sensible initiatives, and we believe that they show Macy's thinking is on the right track. However, the roll out is incredibly slow as Macy's, perhaps understandably, wants to test the new concepts before committing them to all its stores. Ultimately, this means material gains from such improvements will not come through until next year at the earliest.

While Macy's is doing some positive things, there is one area of its thinking with we take issue: the view that Backstage should be added to existing Macy's stores. As much as we can see the logic for this from the perspective of trying to make space more productive, we believe the strategy will ultimately fall short. From our customer data, we see evidence that such a move pulls customers away from the full price offering at stores and ends up cannibalizing sales. It also sends confusing messages to the customer about the Macy's brand. There is no doubt that Backstage is a good concept and one that Macy's should pursue, but we believe it is better suited to stand-alone locations in units where rents are cheaper.

Overall, our sense is that Macy's now has a much clearer sense of direction and it has a rudimentary road map to help it get to where it wants to go. However, the distance it needs to travel over the next few years is enormous. We question whether the company is bold, nimble or healthy enough to cover such ground.
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