On Wednesday, Macy's (NYSE:M), a $20.6 billion retailer, announced its earnings for the most recent quarter as well as a bold new restructuring plan. On top of strong growth in comparable-store sales, the company saw another boost from its store-within-a-store business concept. However, Macy's restructuring plan has raised some eyebrows, especially because of the company's decision to lay off about 2,500 employees.
You see, during the past few years, Macy's sales and net income have grown significantly. It doesn't seem reasonable for a healthy and growing enterprise to let people go. Apparently, in an attempt to improve itself, the company believes that some of its workforce is no longer needed and that the cost savings from displacing these employees will reduce its costs by $100 million a year. In any business, it can be beneficial to trim excess cost centers, but is Macy's making the same mistake that Home Depot (NYSE:HD) did in the early 2000's?
Home Depot: a case study in profit seeking gone wrong
In December of 2000, Robert Nardelli was brought into Home Depot as the company's new CEO following the departures of co-founders Bernard Marcus and Arthur Blank. Drawing on his earlier experience as a top executive at General Electric, Nardelli focused on cost cutting more than on fostering a strong corporate culture.
As a result of this move, the company saw a rapid increase in sales. Sales rose from $45.7 billion when Nardelli started in his role in 2000 to $81.5 billion for the company's 2006 fiscal year which was his last year in power. Over the same time-frame, Home Depot's net income increased from $2.58 billion to $5.84 billion. At first glance, these results would signify a slam-dunk. However, Mr. Market was not amused by Nardelli's actions.
At a time when competitors like Lowe's Companies were performing well, the market cap of Home Depot actually shrank by 18.8% from $106.3 billion to $86.4 billion. The logic behind this move in light of the company's increased sales and profits stemmed from the market's perception of the long-term effects of Home Depot's cost cutting. Instead of merely finding ways to reduce product costs as a percentage of sales, management set their sights on reducing labor costs.
Although the number of employees working at Home Depot ballooned by 45.8% from 227,000 to 331,000 during Nardelli's tenure, the number of employees per store fell sharply. In fact, by the time Nardelli left his post the number of employees per store had plummeted by 26.3% from 201 to 148. This, combined with the company's decision to rely more on part-time workers and cheaper workers who knew comparatively little about home improvement, caused investors to lose confidence in Home Depot.
Evidence of a decline in Home Depot began to emerge in 2006, just prior to Nardelli's resignation. In the third quarter of that year, comparable-store sales declined 5.1% as customers began to express themselves by talking with their feet.
Macy's has been doing great but it wants to do better!
Over the past four years, the story at Macy's has been good and getting better. Revenue at the company rose 17.9% from $23.5 billion to $27.7 billion, while net income rose 305.8% from $329 million to $1.34 billion. In comparison, over the same period Dillard's (NYSE:DDS) saw its sales rise only 8.4% but its net income jumped 390.5%, while J.C. Penney's (NYSE:JCP) sales fell 26% and its net income of $251 million turned into a $985 million loss. Kohl's (NYSE:KSS) also had a subpar performance in comparison to Macy's. Using the same time-frame as a proxy, Kohl's saw its revenue rise 12.2% but its net income inched up only 1.3%.
Source: SEC Edgar Database
Looking at the table above, we see that despite the higher level of growth and profitability the company experienced in comparison with its peers, Macy's does have the largest number of employees on a per-store basis. This number has only been growing too! Between 2010 and 2013, the average number of employees per store has risen by 10.3%. This compares to the 5.9% drop seen at Dillard's, the 6.3% drop at Kohl's and the 24.4% drop at J.C. Penney.
Using this metric alone, the Foolish investor might think that cutting some of these employees might not be such a bad idea. On top of having 79.7% more employees per store, on average, than some of its largest peers, Macy's has been increasing its headcount per store while others are cutting back on theirs.
Source: SEC Edgar Database
Although employees are oftentimes a company's largest cost, they also help generate revenue through the services they perform and the goods they produce. One way to test the value of a company's employees is to compare the revenue per employee of a company to those of its peers. Sure enough, despite the higher headcount, the greater number of employees per store at Macy's doesn't appear to be impairing its revenue. In fact, the revenue generated per employee at Macy's is actually more than each of its peers with the exception of Dillard's.
Based on the data provided above, the situation at Macy's appears to be good and getting better. In an attempt to reduce costs and please shareholders, management believes that reducing headcount will result in significant cost savings. While this is true, the company should be wary of how much cost cutting it's willing to do and the long-term impact it might have on the company's prospects. Otherwise, it might end up with a situation akin to the one faced by Home Depot in the early 2000's.