3 Ways Macy’s Responds to COVID-19

The COVID-19 pandemic crushed Macy’s (NYSE: M) business earlier this year, and while the worst seems over, sales trends remain weak by historical standards. The department store giant suffers from both low demand for some of the products it sells, low mall traffic and the reluctance of some consumers to visit stores in person.

On Macy’s recent second quarter earnings conference call, management highlighted several ways in which it is adapting to the abrupt change in the consumer environment.

Double backstage

Macy’s had already made over-the-counter retailing a key part of its growth strategy before the pandemic hit. On its Investor Day in February, the company said it plans to continue adding more Backstage stores in one store to its full Macy’s fleet while opening new independent Backstage stores. In 2018 and 2019, existing Backstage stores – even those attached to struggling full-line stores – experienced consistent growth in same-store sales.

The pandemic has added to the urgency. While backstage sales decreased by 45% year over year in the last quarter, it was significantly better than the 61% drop reported by Macy’s in total in-store sales. Sales trends at Macy’s Backstage have continued to improve in recent months, as the retailer emptied seasonal inventory and imported more in-demand fresh merchandise.

Image source: author.

CEO Jeff Gennette noted on the recent earnings conference call that Backstage is generating a strong gross margin over competing non-price chains. Its biggest weakness from the point of view of profitability lies in the high distribution and logistics costs. This is largely a function of the concept’s relatively low sales volume. By driving comp sales growth, launching a Backstage e-commerce business, and opening additional locations (both independent and in Macy’s full line stores), Backstage will grow in scale and become a major growth engine. benefits.

Looking for Bloomingdale’s for Growth

Relaunching Bloomingdale’s growth has also become a key priority for Macy’s. In recent years, Bloomingdale’s has been an afterthought for the company. the high-end department store chain accounted for about 11% of the company’s revenue last year, and management had bigger fish to fry: namely, revolving around the Macy’s mass-market chain.

However, Bloomingdale’s is currently benefiting from an increase in demand for luxury items in categories such as home goods, jewelry, perfumes and accessories. Company executives believe some affluent consumers who cannot spend money on travel due to the pandemic are redirecting their dollars to luxury purchases. In addition, Bloomingdale’s has the opportunity to gain market share from competitors who are closing stores or going out of business (including Barneys New York, Neiman Marcus and Lord & Taylor).

In the short term, Bloomingdale’s is working to fine-tune its merchandise assortment to take advantage of this shift in demand trends. In the longer term, management intends to build on the brand’s momentum by testing a new small-format concept outside Bloomingdale’s shopping center. The first of these stores is slated to open in the fourth quarter of 2021. If successful, this new store format could open up future growth opportunities by positioning Bloomingdale’s in places that many customers (and potential customers) would find more convenient than regional shopping centers.

Rely on the house for a return to growth

Finally, like many other retailers, Macy’s has found that consumers have a great appetite for spending money on their homes right now. In the last quarter, Home / Other category revenue (which also includes heavily impacted items like restaurant sales) declined 15% year-on-year: around 25 percentage points better than the rest of the year. ‘business.

Heading into 2020, Macy’s planned to focus on some low-margin parts of its home department, like kitchen electricity. In today’s environment, it is looking to get the best of both worlds by adding new products through its direct e-commerce program with suppliers, which alleviates margin difficulties in certain categories of houses by shifting inventory risk. to suppliers. Meanwhile, Macy’s is looking to build on its momentum in the highly profitable categories of furniture and mattresses.

Macy’s certainly faces many headwinds that could disrupt its recovery from COVID-19. But with two of the country’s best-known brands, a large growing e-commerce company, a portfolio of valuable real estate, and a recently lean cost structure, investors shouldn’t rule out Macy’s either.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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