How Magic Plays Into the Macy's Inc. Turnaround Plan

Competition among retailers is tougher than ever, especially for primarily brick-and-mortar operations like Macy's (M -1.52%). Although third quarter profits came in higher than expected, the market isn't convinced the company has a bright future, and the stock is down over 17% since the earnings release.

In this video segment, The Motley Fool's Chris Hill and Jason Moser discuss whether traditional retailers will be able to catch up with innovative online competitors. And will Macy's new strategy ring up growth?

A full transcript follows the video.

This video was recorded on Nov. 11, 2015.

Chris Hill: Macy's third-quarter profits came in higher than expected, but sales fell 5% and they lowered guidance for the full fiscal year. And when this earnings season kicked off and we talked about what are you watching, what are you looking for, I said the thing I'm the most interested in is what is the retail guidance heading into the holiday quarter and at least in the case of Macy's, it is not looking good and the stock is down 13% this morning.

Jason Moser: No. And I tell you, I was looking at this. I don't think it's any accident that we're seeing a falloff in businesses like Macy's and Bed Bath & Beyond -- that for so long they've relied on that physical presence being sort of anchors in shopping malls and whatnot. You know and I mean you see this sort of a falloff in your Macy's and Bed Bath & Beyond's really offset by such a tick-up in businesses like Wayfair.com, Amazon.com.

Now Wayfair, forget about the 14% drop those shares took yesterday. I think the stock's up like 7% today as we speak. So it is coming back a little bit. But it was a good quarter they turned in. I mean every metric is pointing in the right direction. And Amazon, of course, also turned in a very strong quarter. So I just think it's very telling we're seeing ... I mean we're definitely seeing sort of the way of the future here.

I mean consumers' behavior is changing and I think the more quarters like this we see from businesses like Macy's, the more we can start to sort of see, "OK, maybe Jeff Bezos isn't such a dummy after all. Maybe investing all the money back in the business, maybe he actually has a strategy there." I mean I'm being facetious obviously because we love Amazon, and we do get that strategy.

And I think really we have the luxury being able to look at it with a little bit more of a longer timeline so to speak. But I think that's also what Wayfair is doing. I mean you read through their call and they are very much building that business in the model of an Amazon. And so I think whenever you know to slowdown for the holiday season and you're a retailer, man, you are toast. And over the past five years, if you're a Macy's shareholder, you're feeling pretty good right up until about July of this year where shares just fell off.

Hill: I was going to say, for awhile there Macy's stock was having a good run. They appeared to do a very good job of managing their inventory, also their physical footprint. I mean it just, it really seemed like they've got some smart operators at the top because for whatever else is going on with general retailers, it is to a very large degree about: "How well do you operate?" "How well do you manage your inventory?" "How smart are your decisions when it comes to expanding your footprint?" Etcetera, etcetera. And Macy's has, like you said over the last five years or so, they've done a very good job of that. But kind of taking it in the teeth today.

Moser: Yeah and I think maybe with Macy's there are number of things that people were kind of giving it a little bit of credit for in just the Macy's brand. I think like you said, historically speaking, they've done very well and they do have a tremendous physical presence. And so, I think it's really interesting to see.

Even though on today's call with Macy's CEO Terry Lundgren, who historically doesn't even show up on those conference calls, was on the call today. Now if I saw something that ... I saw a statistic on Twitter, if it's correct, this was his first conference call that he attended in a number of years. And so that is in fact correct. I mean, then, that shows you I think even he recognizes that they are in a bit of a dire situation.

But again, I mean I think with Macy's people were thinking there's a brand there. There's even a lot of real estate. They have a lot of real estate. They own more than half the stores. And so there was the thinking at least that they may look at that real estate and consider some type of a REIT spinoff or something like what Darden restaurants just recently did or is in the process of doing.

And they said in the quarterly report today they're not going to do that right now. That's not going to be the focus. Instead they have this strategy in place that really is going to kind of guide the turnaround. We talked last week about Whole Foods and they recognize their headwinds, and they have like nine-point strategy that they're going to address here.

Now Macy's has a strategy, which with the acronym is kind of creepy. The acronym is MOM. So it's their MOM strategy. It just kind of sounds weird.

Hill: MOM standing for what?

Moser: MOM standing for... let's address what MOM stands for because this is where I think it becomes a little bit more concerning. The first M is for My Macy's. And then they're focusing on localization and personalization -- taking those Macy's wherever they are and making those Macy's cater more toward the regions in which they are.

Hill: That seems to make sense.

Moser: It makes sense to a degree. The O stands for omnichannel and so we talk a lot about online commerce and physical commerce and being able to sort of order online and pickup in store.

So basically what Macy's does now is they refer to everything just as this omnichannel. They don't even break out online sales anymore. The estimates are they do about 15% of their business online today. But focusing on the omnichannel, developing that e-commerce business, the pickup in store, making the in-store experience more magical. And that magical leads to the next M.

The final M is magic selling. And this is where it gets a little fluffy because they're basically focusing on making the experiences in the store not only magical but making it magical beyond the store setting. So they're talking about just the feeling that you get from being associated with Macy's, having sort of the digital, the e-commerce presence where you feel like whether you're at your computer or in a store, that it's a great experience. And magic is the word that they use. And it seems like they could be kind of overthinking this one a little bit.

Hill: I was with them right up until the magic selling.

Moser: Yeah. I was ...

Hill: The localization and the omni, like I'm nodding along to both of those. But you lost me, Macy's, when you started talking about magic.

Moser: The magic is kind of where I got lost as well and maybe there was something magical about that back in the day when that big-box retail store was such a big deal, right? I mean you remember when we were kids and there was the mall and these big places where you go.

And Christmas was a time where they would decorate these things out. I mean maybe there was a feeling of magic to a degree and being able to go there, but it seems like it's a bit of stretch. But that's the strategy, the MOM strategy and that's basically what we're going to be able to look at here in the coming quarters to sort of judge them.

But, again, I kind of go back to the writing is sort of on the wall here, right? With businesses like Wayfair and Amazon... just consumer's behavior is changing and I don't think Macy's is necessarily keeping a step ahead of the game here.