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Macy’s posts disappointing Q3; pursuing real estate options (but no REIT) and outlet growth


Macy’s Inc. on Wednesday blamed warm weather, weak tourist traffic and excessive inventory for the company's worse-than-expected third quarter results. The company said it will not pursue spinning off its properties into a real-estate investment trust, but that it is studying real estate options for some of its most iconic stores.

In the third quarter ended Oct. 31, Macy’s profit dropped 46% to $118 million, down from $217 million in the same period a year ago. The company attributed the steep decline to a $111 million impairment charge related to store closures.

Same-store sales declined 3.6%. Sales slipped 5.2% to $5.87 billion, missing Wall Street expectations of $6.1 billion.

“We are disappointed that the pace of sales did not improve in the third quarter, as we had expected. Spending by domestic customers remained tepid, especially in key apparel and accessory categories. Simultaneously, the slowdown in buying by international visitors continued to significantly impact Macy’s and Bloomingdale’s stores in tourist centers, which are some of our company’s largest-volume and most profitable locations,” said Terry J. Lundgren, chairman and CEO of Macy’s.

Macy’s third-quarter results provided considerable insight into the chain’s upcoming plans. Here are the highlights:

Macy’s Backstage, Bluemercury

Over the next two years, the company will roll out about 50 free-standing Macy’s Backstage stores in off-mall locations, building on the pilot launch this fall.

In addition, in spring 2016 the company will pilot Backstage stores within up to 10 existing Macy’s store locations, creating what it called a new “hybrid store, the first in retailing,” that offers the latest fashions, outstanding service and major brands for which Macy’s is known, along the bargains at Backstage.

Also, Macy’s plans to open approximately 40 additional Bluemercury self-standing beauty specialty stores, bringing the total store base to approximately 115 by the end of 2017), while also integrating Bluemercury shops into the beauty departments of Macy’s stores.

Real Estate

Based on a successful collaboration regarding Macy’s previously announced Brooklyn store redevelopment project, the retailer is expanding its relationship with Tishman Speyer to advise and support the company’s senior management team to identify and advance potential store redevelopment projects nationwide.

Macy’s said that while it has decided not to pursue the formation of a REIT for the time being, it is exploring joint ventures or other deal structures with third parties to redevelop Macy’s flagship real estate assets in Manhattan, San Francisco, Chicago and Minneapolis. Any deals would maintain a robust Macy’s store presence while also bringing “alternative use” into the buildings.

Macy's said the exploration could expand to include other assets, including mall-based properties.

In early 2016, as previously announced, the company will be closing 35 to 40 of its current portfolio of about 800 Macy’s and Bloomingdale’s stores. The retailer said it expects to continue to reduce its number of stores over time.

Business Strategies

Macy’s said it is:

• Accelerating investments in Macy’s, Bloomingdale’s and Bluemercury’s digital and mobile capabilities to mirror the shift to increased online shopping, where the company continues to see double-digit, year-over-year sales increases. Macy’s in ranked as the seventh largest Internet retailer in the United States.

• Concentrating its resources in top stores in the best locations so each store is more compelling and uses its selling space more productively. Best stores will see intensified merchandise assortments in key destination departments such as jewelry and watches, strategically selected licensed departments, strengthened visual presentation, enhanced staffing and more local marketing.

• Reducing expense and tightening capital spending to operate more efficiently and fund the highest-potential growth initiatives. Macy’s plans to reduce capital spending to less than $1 billion in 2016 from the $1.2 billion expected in 2015.

Lowers Guidance

As a result of its disappointing performance, Macy's lowered its profit and sales guidance for the year. Diluted earnings per share are now expected to fall in the range of $4.20 to $4.30, excluding asset impairment charges associated primarily with previously announced store closings. This compares with previous guidance in the range of $4.70 to $4.80. It also now expects comps to dip 1.8% to 2.2%, compared with previous expectations that comps would be flat.

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