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Why Macy's is looking for a miracle on 34th street


Macy’s blamed warm weather, weak foot traffic and excessive inventory for the company's worse-than-expected third quarter results and said it is studying real estate options for some of its most iconic stores.

The company reported that in the third quarter ended Oct. 31, same store sales declined 3.6%. 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.Sales slipped 5% to $5.9 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 chief executive officer of Macy’s, Inc.

Some analysts said that after the retailer's third straight quarterly decline in comp growth, they are unsure whether Macy's can recapture the retail magic that once lured shoppers of all ages and tourists to the traditional department store retailer.

"The laundry list of excuses, which includes the strong dollar impacting tourist spend at key locations, has yet again been rolled out as a justification for the slide. While there is some truth in these points, they do not tell the whole story and they do not provide an adequate explanation for the sharper deterioration of the company’s top line," said Neil Saunders, CEO of retail research agency Conlumino. "The wider truth is that Macy’s remains a business that is somewhat out of kilter with what modern consumers want. Ranges, store locations, and its general store environment are simply not optimized to deliver; and in an era when consumer spending remains constrained, Macy’s is increasingly losing out."

As a result of the disappointing performance, Macy's lowered its profit and sales guidance for the year. The company now expects comps to dip 1.8% to 2.2%, compared with previous expectations that comps would be flat.

“We have begun testing and learning from new sales growth initiatives that we believe will begin yielding incremental results in the quarters and years ahead. This included the opening of the first five Macy’s Backstage off-price stores in the New York City metro area (with a sixth opening planned in the fourth quarter),” Lundgren said.

Macy's also reported disappointing results in the second quarter and said it would form a real estate investment trust. But the company backtracked Wednesday, saying a REIT was no longer planned but that the company was considering redeveloping some flagship properties through joint ventures or other deals.

Macy’s outlined the following strategic real estate initiatives:

  • The company has begun a process to explore joint ventures or other deal structures with third parties to redevelop Macy’s flagship real estate assets in Manhattan (Herald Square), San Francisco (Union Square), Chicago (State Street) and Minneapolis (downtown Nicollet Mall) in a manner that maintains a Macy’s retail store presence while also bringing alternative use into those buildings; this exploration could expand to include other assets, including mall-based properties, to the extent opportunities are available.

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

  • The company will continue to pursue selected real estate dispositions and monetize assets in instances where the business is simultaneously enhanced (such as the recently announced real estate sales of underutilized portions of properties in Brooklyn and downtown Seattle) or where the value of real estate significantly outweighs the value of the retail business (such as the recent sale of Macy’s stores in Cupertino and downtown Pittsburgh).

  • While much work has been done to date, Macy’s, Inc. is continuing to analyze its real estate portfolio to identify opportunities to drive additional shareholder value. The company is open to considering additional ideas for further enhancing shareholder value while maintaining an investment-grade credit rating and an operating structure that fosters sales and earnings growth.

The company also said it is continuing to execute a number of key strategies and actions going forward to adapt its business model as an omnichannel retailer committed to utstanding stores as a competitive differentiator, including: 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.

The company also outlined new directions for the long-term:

  • 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 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 with the thrill of the hunt associated with the finds and bargains at Backstage.

  • 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.

Also on Wednesday, the company announced thatRay-Ban maker Luxottica is set to open concessions of its LensCrafters optical retail brand in as many as 500 Macy's shops over the next three years.Milan-based Luxottica, for whom North America is the biggest market, has already an accord with Macy's giving its Sunglass Hut brand some 670 locations within the U.S. shop chain.

LensCrafters, which will be the exclusive optical retailer at Macy's, will open its first concession in April with the goal of opening around 100 by the end of next year.

Macy's Inc. operates about 900 stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy’s, Bloomingdale’s, Bloomingdale’s Outlet, Macy’s Backstage and Bluemercury, as well as the, and websites.

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