Retail apparel companies seem to be dropping like flies, and the difficult operating environment induced by the pandemic might soon claim even more victims.
Storied menswear retailer Brooks Brothers announced this week that it is seeking Chapter 11 bankruptcy protection, while it reorganizes and looks for a buyer. Many other companies that were struggling even before the COVID-19 crisis might be on their way toward a similar outcome -- and in this industry, Macy's (NYSE:M) could be next.
The problem at Macy's
Macy's was once one of the biggest names in retail, given its huge footprint with hundreds of department stores, most of them mall anchors. Its flagship Herald Square store in New York City is a tourist attraction that takes up an entire block of Manhattan real estate (property valued at over $3 billion, according to one analyst).
But while these factors previously made Macy's stand out, they've also been the source of its more recent struggles.
The rise of online shopping has taken a terrible toll on department stores, which depend on in-store customer traffic to move huge amounts of inventory and justify their rent. While brick-and-mortar heavyweights like Macy's and Nordstrom have generally been successful in building e-commerce channels to complement their traditional stores, they've still been left with heaps of income-eating real estate. Macy's comparable-store sales have declined in four out of the last five years. Those large physical footprints are growing more outdated as consumers not only move an ever-increasing share of their shopping online but also gravitate toward smaller stores that offer a different experience when they do shop in person.
How it's been playing out
Macy's sales began to decline about five years ago, and since then, the company has adopted many measures to lure customers back into stores. It redesigned many locations, created boutique-style shops within its stores, and developed company-owned brands geared toward the modern shopper. It also heavily invested in digital channels.
This is how the company was doing in the year leading up to the pandemic.
Comparable-sales growth (decline) YOY
More recently, management announced what it has dubbed its "Polaris strategy," which consists of five parts:
- Building up the loyalty program;
- Curating a better assortment of brands, including private-label offerings;
- Accelerating digital growth;
- Optimizing the store portfolio, including store closures;
- Cutting costs.
As management unveiled Polaris in early February, the COVID-19 pandemic was making its way across the globe and disrupting life as we know it.
Stores were closed between March 17 and May 4, and the company has gradually reopened most of its locations. In a March 30 press release, the company noted, "While the digital business remains open, we have lost the majority of our sales due to the store closures." Macy's went on to cancel its dividend, draw down its credit line, freeze hiring, cut spending, and furlough most of its workforce.
Is bankruptcy coming?
Despite those steps, Macy's chose to raise an additional $4.5 billion of debt financing, which the company has indicated would be sufficient for it stay liquid as business recovers from the lockdowns. And at the end of June, management announced a major restructuring that would significantly reduce the company's size by slashing 3,900 corporate and management jobs, reducing its store worker count, and introducing over $600 million in annual cost savings.
"We know that we will be a smaller company for the foreseeable future, and our cost base will continue to reflect that moving forward," CEO Jeff Gennette said. "Our lower cost base combined with the approximately $4.5 billion in new financing will also make us a more stable, flexible company."
And so far it's true. Although the company reported an adjusted net loss of $630 million in its fiscal first quarter, which ended May 2, second-quarter sales have so far been stronger than expected.
Macy's is doing everything it can to stay afloat, including facing the reality that it's going to emerge from the pandemic a very different business. While that may be worrisome to investors, it allows the department store chain to avoid a bankruptcy filing, and Macy's believes current liquidity should cover it through 2021.
Despite the silver lining, investors should steer clear of this retail stock as there are still too many headwinds that will challenge the company every step of the way on its road to recovery. As bad news keeps rolling in for fellow retailers, another upheaval could be just around the corner for Macy's too.