How Macy's Is Reinvigorating Its Top and Bottom Lines

Less than a year ago, many investors thought Macy's (M -0.13%) was experiencing a terminal decline. The department store giant was in the midst of an 11-quarter streak of falling comparable-store sales, and profitability was eroding steadily. Yet Macy's managed to return to sales and earnings growth in late 2017, and its momentum now seems to be building.

In this segment from Industry Focus: Consumer Goods, the team breaks down several strategies that Macy's has leveraged to power its recovery. Changes to its loyalty program and the addition of off-price sections to many of its stores have been two of the biggest factors driving the company's rebound.

A full transcript follows the video.

This video was recorded on June 12, 2018.

Vincent Shen: Let's get into some of the details, then, for each of these companies. I appreciate the overview, so listeners have an idea of what's going on, what ultimately helped to drive the rallies that we've seen. Let's look at Macy's, for example.

I was going through the earnings call, the comments from management, and I saw that Macy's team spent a lot of time, for example, talking about the progress that they're making with the company's five strategic initiatives. Those include their Star Rewards loyalty program. They launched that in October. It seems like they're expanding that to more customers, including those who don't have a Macy's credit card. They have the growth of the Backstage concept. They have 100 of those Backstage concepts opening in Macy's stores in fiscal 2018, and they're making their way to high-end malls, also to the West Coast for the first time. There's the vendor-direct expansion, which is basically items purchased online from the Macy's website being shipped directly from the vendor to customers. Their omnichannel efforts, that's No. 4, we've seen elsewhere the importance of the omnichannel. Here, it's things like buy online, pick up in store; buy online, ship to store. They're expecting those things to be available in every location by August.

Then, No. 5, there's Growth 50. This was one that I thought was really interesting, where basically, management has taken the most promising initiatives that they tested in 2017 and they've rolled those out to 50 test locations, so then, later this year, they have data information from those test locations on how customers respond to various things. Ultimately, they're hoping to find a new model that the company can scale going forward.

Beyond these strategic initiatives, and I know there's a lot of other efforts that management discussed during the call, is there anything that stands out to you in terms of the past quarter, the past six months, that you think is really promising long-term for the company?

Adam Levine-Weinberg: Yeah. There's a few things that I would highlight. The first is that change in the loyalty program that you mentioned -- it's really a series of changes. This was something where, the loyalty program had been the same for a long time. The management team realized that it was really more of a rewards program than a loyalty program. You shopped, you got coupons, you could come back and shop again, get a little discount. It didn't actually encourage people to be loyal, it didn't have that kind of differentiation where the more money you spent with Macy's, you would see a big increase in the value you'd get, so they changed the program. I'm sure that there will be other tweaks coming up in the future, as they see how customers react. But they rolled out the first iteration last fall. It seems to be working so far.

Some of the things that they've added is, customers who are spending more money with them can now get free shipping on all of their e-commerce purchases without having to hit that minimum that's required for a typical customer. That encourages those people who like shopping at Macy's to shop there more. If you get up to a certain level of spending, you'll get 5% back in rewards. That's similar to stuff we've seen at Target with their credit card, where it has a 5% reward built in.

There are various initiatives like that. I won't go through all of them. The key really, strategically, is that they want to make sure that people who are spending more are being rewarded for that and being incentivized to spend even more money at the store. Macy's realized a year ago they have this huge base of customers; they have huge recognition. People know what Macy's is, and they want to go from being familiar to being people's favorite store, getting people who already shop there a little bit to shop there more, people who shop there a lot to add even more to their baskets at Macy's. That's been quite successful so far. Generally speaking, with these loyalty changes, it takes a while for them to really gain steam as customers begin to understand the changes and modify their behavior. I think that you could see, over the next 12 months, even more gains coming from that loyalty change.

The second big thing is the Backstage rollout that you talked about. Coming into this year, Macy's had Backstage stores in about 50 of its full-line locations. It's found, over the past year or so, that those locations have about 7% increase in sales relative to a control group, which is similar stores that didn't get Backstage. That's a pretty good indication that, in addition to being a more productive use of some store space, that the Backstage stores are also encouraging people to come back more often. As an off-price concept, they have a rotating merchandise selection which changes frequently. That gives customers an incentive to come back frequently to see what's new, whereas a typical department store arrangement might only change every three months.

That's been pretty successful for them, so Macy's is going to be rolling that out to another hundred stores this year, roughly tripling the footprint. The Macy's CEO recently stated that, in an ideal world, he'd like to have Backstage in every single store, eventually. That would be quadrupling, again, from where Macy's expects to be at the end of this year. When you roll out a 7% sales lift across the entire chain, that can have a really pretty significant impact on both sales and on profitability.

I would say that those are the two most important, in terms of initiatives that really have a long-term, positive impact on Macy's sales and earnings.