Like most businesses, Macy's (NYSE:M) is experiencing significant disruptions in its operations because of the COVID-19 pandemic. It had to close nearly all of its stores simultaneously, which reduced sales substantially. As a result, the company reported a $3.6 billion net loss in its most recent quarter.
Macy's started reopening stores on May 4. However, coronavirus cases are surging in Florida, Texas, and Arizona. While the company does not expect to have to shut down all of its stores again, it did acknowledge that it might have to close a few locations where the spread of the virus is rampant.
It was clear to management that it had to make adjustments to deal with the coronavirus lingering around for an extended time. Let's take a closer look at three of those changes.
Management is bringing its Polaris strategy in for alterations
The Polaris strategy is a long-term plan to reinvigorate Macy's same-store sales growth (a key retail metric that takes out the one-time boost of new store openings). The original priorities of the plan were to enhance shoppers' digital experience, decrease expenses, and upgrade the best-performing stores. The changes caused by the coronavirus pandemic led the company to make the following three adjustments.
First, it decided to pause its plan to upgrade its top stores. Importantly, Macy's investment in its best-performing stores was proving to be successful. Comparable-store sales growth of the 150 stores it upgraded outperformed the rest of its stores by 3%. Yes, a pause in those investments will conserve critically important cash in the near term. However, it may lead to slower same-store growth in the longer run.
Second, it decided to accelerate its cost-saving initiatives. Macy's was already planning to reduce expenses and create savings of $1.5 billion by 2022. However, the impacts from the pandemic are leading management to accelerate those plans. The majority of the cost savings will come from reductions in employee headcount -- by letting go of an additional 4,000 people.
Lastly, it increased the pace of the shift to digital. As its stores were closed, the company's online sales penetration in the quarter increased to 43%. Perhaps one of the long-run consequences of the outbreak is a broad acceleration in the shift to digital. Businesses ranging from Macy's to Nike to Amazon reported surges in online orders during stay-at-home orders. For Macy's, digital sales continued to be strong even in areas where stores reopened. Management therefore realized that to thrive in the post-pandemic environment, it would need to focus more on the digital experience.
What this means for investors
The coronavirus pandemic significantly affected Macy's and the brick-and-mortar retail industry in general. One of its competitors, JC Penney, filed for bankruptcy as a result. Admittedly, JC Penney was already on thin ice even before the pandemic. Still, it's hard to survive as a retailer when you are forced to close your doors to customers.
The adjustments Macy's made are geared toward ensuring it makes it through the pandemic. While it appears that the company will survive, there will be a long-run cost to these changes. Pausing the investment in its best-performing stores will have some negative effect on future sales. Closing stores and reducing headcount will make it difficult to recover to pre-pandemic levels of revenue, even when there is a return to normalcy.
Nevertheless, it will be interesting to observe whether the smaller, nimbler, more digital-centric Macy's will be a better retail stock.