Opinion: Macy’s still failing on retail 101

The best thing that can be said about Macy’s fourth-quarter results is that they won’t be as bad as some other players in the department store segment. Such faint praise underlines the fact that Macy’s isn’t really making much progress and has yet to address the fundamental weaknesses in its business model and proposition.
 
Quite naturally, Macy’s is trying to put a gloss on the results by pointing out that the comparable sales shrink of 0.6% is a marked improvement on the decline of 3.9% it posted in the third quarter. While the observation is accurate it ignores the underlying math. The improvement is largely down to a much softer prior year comparative in quarter four than in quarter three; it is categorically not an indication that Macy’s strategy is bearing fruit. Equally, Macy’s claims that it executed holiday well are a partial truth. In some stores, holiday assortments were good, but in most execution was dire, and inspiration was thin on the ground.
 
The dismal trading numbers – and the accompanying 54% decline in net income – have led Macy’s to change tack with a new Polaris strategy. This three-year plan is designed to restore profitability and growth to the ailing chain.
 
Aside from the fact that the strategy contains many changes that should have been made years ago, Polaris seems like a sensible blueprint. The decision to accelerate the closure of underperforming stores is reasonable, not least because it will allow Macy’s to concentrate investment into locations where it can generate a better return. Equally, the decision to accelerate own-label development is healthy, especially in fashion and home where it will boost margins and create a point of differentiation. That said, we do harbor some concerns.
 
First and foremost is Macy’s ability to execute. Unfortunately, there are too many past examples where Macy’s has been unable to deliver on its plans. As such, we believe the jury is still out on whether Polaris will transform in the way Macy’s wants it to.
 
There are also areas where it falls short. For example, the expansion of the store refurbishment program is modest – especially compared to the plans of rivals like Target – and we believe that Macy’s should have far more ambition to create a fleet of stores that is truly fit for 2020 and beyond. We are also concerned that the shuttering of so many stores may impact online traffic as the Macy’s brand becomes less visible; our own data shows a very clear relationship between sales volumes and a physical presence in a catchment, and this is something Macy’s will need to address.
 
The decision to test new formats, such as Market by Macy’s, is innovative but not a silver bullet. In terms of location, Macy’s will still need to contend with very tough competition and from what we have seen so far, although the format and merchandise is better, we question whether it stands out enough to produce stellar results. The same applies to the expansion of the Backstage off-price format. There is no doubt that this concept has relevance, but Macy’s is essentially expanding into a market that is already extremely crowded with highly-skilled players like TJX so returns are questionable.
 
As much as we are pleased to see Macy’s set out a grand plan, we still believe that much of the low-hanging fruit has been missed. Too many stores suffer from a lack of basic disciplines – merchandising is terrible and even tasks like dusting fixtures are overlooked. In essence, Macy’s is still failing on retail 101 and this does not bode well for its prospects in more advanced studies.