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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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Big shakeup at Whole Foods Market

BY Marianne Wilson

There’s been a reorganization at Whole Foods Market.

On Wednesday, the natural-foods retailer named a new chairwoman and five new independent directors, effective immediately. It also appointed a former Kohl’s executive as CFO.

The changes come as activist investors and restless shareholders have been demanding Whole Foods accelerate the turnaround of its business. The board shakeup came on the same day as the retailer released second quarter earnings that met analysts’ expectations.

The chain reported adjusted earnings of 37 cents per share on $3.74 billion in revenue for the second quarter. Same-store sales, however, fell for the seventh straight quarter, declining 2.8%.

Whole Foods named private equity executive Gabrielle Sulzberger as its new chairwoman. She is the wife of Arthur O. Sulzberger Jr., chairman and publisher of The New York Times.

The new directors are Ken Hicks, a former CEO of Foot Locker; Joe Mansueto, the founder and chairman of Morningstar; Sharon McCollam, a former CFO of Best Buy; Scott Powers, a former VP of State Street Corporation; and Ron Shaich, the founder and CEO of Panera Bread Company.

“With today’s additions to the board, and changes in our board’s leadership, we are well positioned as we enter the next phase of our evolution,” said John Mackey, co-founder and CEO of Whole Foods. “We believe that we have the right plan – and the right team – to execute on our initiatives at an aggressive pace, deliver results and enhance value for our shareholders.”

In addition, Whole Foods tapped Keith Manbeck as its new chief financial officer, effective May 17. He has served as senior VP of digital finance, strategy management and business transformation at Kohl’s since 2014. Prior to joining Kohl’s. Manbeck served as global VP and CFO for Nike’s Direct to Consumer business, At Whole Foods, he succeeds Glenda Flanagan, who announced her intent to retire from the grocer last year. She will remain with Whole Foods in a senior advisor capacity.

Whole Foods noted that with the newly announced changes. Its board will comprise 12 directors, 10 of whom are independent and six of whom were added in the last seven months. The new board includes nine directors who are current or former CEOs or CFOs and four female directors.

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Teen apparel retailer confirms takeover interest

BY Marianne Wilson

Abercrombie & Fitch may sell itself.

The teen apparel chain on Wednesday confirmed it is in preliminary discussions with several parties regarding a potential transaction with the company.

Abercrombie confirmed the news after Reuters reported that the retailer had hired an investment bank, Perella Weinberg Partners, to field takeover interest from other retailers.

In its statement, Abercrombie said it does not intend to make any further comments on the discussions until they are concluded. It also noted there was no certainty the discussions will lead to a definitive agreement or a transaction.

Similar to other teen retailers, Abercrombie has been challenged in recent years by fast-fashion stores and online competitors. And while the company’s California surfwear-inspired and less pricey Hollister banner has been on the upswing, its core namesake banner is still struggling to turnaround its image with more inclusive themes. In March, the retailer reported its 16th straight quarterly sales decline.

Abercrombie has been cutting costs and downsizing its retail fleet. Earlier this year, it said that it would not renew the leases of approximately 60 U.S. stores. As of the end of January, the company operated 709 stores in the United States and 189 locations outside the United States.

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