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Here's How Macy's Plans to Stem Sliding Sales

By Jeremy Bowman - Feb 27, 2016 at 4:46PM

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The department store chain knows it has a problem. What investors need to know is whether or not it can find a solution.

Macy's (M -2.71%) closed the books on a dismal 2015 with its fourth-quarter earnings release earlier this week. Adjusted earnings per share fell 14% to $3.77 for the full year, and revenue fell 3.7% on a 2.5% decline in comparable sales.

The holiday quarter was even uglier, as comparable sales dropped 4.3%. 

It's no secret what's ailing the venerable department store chain. A resurgent J.C. Penney (JCPN.Q) has clawed back sales from Macy's, and the department store industry in general is struggling as the e-commerce channel grows and competition from fast-fashion retailers is on the rise.

According to the Census Bureau, sales at department stores nationwide fell 2% last year,  a trend that Macy's and its peers are having trouble dealing with. Unsurprisingly, Macy's plans to take the usual cost-cutting measures, complete with store closures and layoffs. It's set to shutter 36 stores this year, on top of the four it closed at the end of last year -- more than 5% of its outlets.  It will also lay off at least 4,500 employees in an attempt to cut $400 million in SG&A costs.

Here are few of the other things Macy's will do in hopes of turning around its business.

Unlock real estate value 
The company is booking a $250 million gain on the sale of the top five floors of its Downtown Brooklyn store, and it hopes to make similar deals in the future. In the recent earnings release, management said it has begun contacting potentially interested parties for partnership or joint-venture transactions. It said there has been a high level of interest, but that talks are still in preliminary stages. 

Activist investor Starboard Value has urged Macy's to leverage its real estate portfolio, which it estimates could be worth as much as $21 billion -- more than 50% above its current market cap. Management has rejected the idea of forming a real estate investment trust, but seems focused on selling off specific properties or opening them up to partner businesses as explained above. Macy's flagship stores in cities like New York, Chicago, and San Francisco give it an advantage over competitors like J.C. Penney, whose stores are mostly tucked away in suburban malls or rural areas, and unlocking value from those properties could help the company spruce up its retail business.

Opening Backstage stores
Following the lead of Nordstrom (JWN -4.73%) and other retailers that have had success with off-price chains, Macy's is expanding its own off-price brand, adding more Backstage stores. In 2015, the company opened six Backstage stores, and will begin adding new outlets to its full-line department stores, with plans to open 16 Backstage locations this year, all but one of them inside of existing Macy's.  

The idea of opening discount outlets within existing full-price stores has its risks: It could draw customers away from its regularly priced merchandise. Macy's is hoping for an alternate scenario to play out -- that the off-price outlets lure more foot traffic into the department stores. Nordstrom, which has had perhaps the most success with its discount brand, Rack, has kept those stores separate from its full-line chain -- and now has more Rack locations (194) than full-line department stores (121), and until this year, Rack had been growing comparable sales at a brisk pace.

For Macy's, opening a handful of discount stores inside its stores is unlikely to move the needle significantly. If Backstage is going to be a successful brand that's accretive to profits, it needs to have its own locations.

Building its omnichannel strategy
Macy's CEO Terry Lundgren talks about omnichannel -- the philosphy that sellers should use a combination of e-commerce, mobile apps, brick-and-mortar stores, and any other available method of reaching its customers -- as much as any other retailer. Omnichannel is a core component of its M.O.M. strategy, which stands for My Macy's localization, omnichannel, and magic.

In the recent earnings release, Lundgren touted the company's double-digit online sales growth, and noted that Macy's recently opened up a new e-commerce fulfillment center in Tulsa.  

With the company planning to open just one new department store next year, growing sales through its website will become increasingly crucial. Lundgren also noted "exceptional increases in mobile traffic and increased conversions"  as mobile appears to be the next frontier in e-commerce.

For years, the company has offered in-store pickup and ship-from-store options for its customers, but it may need to further differentiate itself to make up for a slide in in-store sales.  

While the company must continue to build its online business, it is ultimately defined by its stores and properties, and the success of its in-store retail efforts will determine its fate. If the company can find a way to drive traffic to its stores, be that through partnerships with other retailers, opening Backstage stores, or programs like in-store pickup, Macy's should return to growth. For now, Macy's has enough options to make Lundgren's promise to "examine every aspect of our business so we can grow profitable sales" credible.   


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Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
$18.32 (-2.71%) $0.51
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Nordstrom, Inc. Stock Quote
Nordstrom, Inc.
$21.13 (-4.73%) $-1.05

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