Sears, once the largest and most important retailer in the United States, floundered and ended up in bankruptcy court. Macy's (M -2.03%) is not Sears, though some investors may tar it with a similar brush given the changes taking shape in the retail sector. Here's why smart investors won't make that mistake.
There are problems
There's no point trying to sugarcoat the obvious issues that large department store retailers like Macy's have faced. A sizable part of the problem is what came to be known as the retail apocalypse, which is simply the increasing use of online shopping among consumers.
This is a very real trend, but the fallout was focused most heavily on the weakest brick and mortar companies, like Sears and its sister brand Kmart. They didn't keep up with consumer buying trends, and they didn't invest heavily enough in the online space, leading to their demise. Heavy debt loads sped the process up too.
Image source: Getty Images.
Think of the retail apocalypse as a culling of an oversaturated field, leaving only the strongest names. The non-essential business closures used to help slow the spread of the coronavirus in 2020 also pushed this process forward, compressing what would likely have been years of slow bloodletting into a one-year bloodbath.
The entire retail sector is on a much stronger footing today. That includes Macy's.
Meanwhile, it turned out that consumers aren't actually moving toward buying everything online. They are, as was always more likely, mixing their purchases, buying some stuff online, some stuff from stores, and some from a hybrid of the two (like buying online and picking up in-store). That's why retailers are focused on omni-channel businesses, which basically just means they try to sell to the consumer where the consumer wants to shop (stores and online).
Moving forward
This is the driving force at Macy's today, with the company working to find the proper mix between physical and online. That has definitely meant closing large, unproductive stores and investing in a better online shopping experience for customers.
But it has also meant opening stores, just in a more judicious fashion. For example, Macy's has been focusing on smaller locations that aren't in malls. Management has found that having a physical presence in a desirable market (meaning one with material population density and wealth) improves online sales.
During Macy's third-quarter 2022 earnings conference call, CEO Jeff Gennette explained:
Clearly, omnichannel sales is what we're really focused on. And when you look at wherever we have a sale or wherever we have a store, you have higher concentration of digital sales being done in those ZIP codes. So, it really is this kind of irrefutable loop that goes on with customer activity.
Smart investors are digging beneath the surface as Macy's shifts its business. The goal isn't to be digital, it is to maximize sales. That includes finding the right physical locations to keep customers buying in person and online, with the goal of lifting overall results.
To be fair, Macy's is still experimenting to some degree as it moves stores out of struggling malls and into smaller, off-mall locations. There's bound to be some mistakes made as it works through this process. But so far management appears to be doing reasonably well. Notably, revenue has completely recovered from 2020 pandemic lows.
Patience is required
If there is a recession Macy's will feel the pinch, just like all other retailers. So there are near-term risks that investors need to consider when examining this stock.
However, if you step back and look at the long-term picture, Macy's has proven to be a survivor in a retail world that changed materially with the emergence of online retail. The company hasn't figured it all out just yet, but it appears to be getting closer and closer to a more balanced approach that will support long-term success. It's the underlying trends in the business that smart investors are focused on.
