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Macy's Inc. reports better than expected earnings

CEO says new growth strategies are working
Macy's Inc. reports better than expected earnings
Posted at 9:07 AM, Nov 14, 2018
and last updated 2018-11-14 12:17:33-05

CINCINNATI - Macy’s Inc. delivered its fourth straight quarter of comparable-store sales growth Wednesday and told investors to expect a bigger profit this year.

It also revealed a new strategy that could lead to a new wave of downsizing in the company's store fleet.

“Our strategic initiatives are gathering momentum and delivering results,” Macy’s CEO Jeffrey Gennette said in a press release. “Another double-digit quarter from our digital business and a strong stores performance combined to help us exceed expectations.”

Macy’s reported a $62 million profit on sales of $5.4 billion. Sales were in line with the expectations of Wall Street analysts, while Macy’s earnings per share of $0.27 was 12 cents better than expected.

The company also performed better than analysts were expecting in comparable-store sales including licensing deals with Sunglass Hut, The Finish Line and other third-party vendors. That closely watched metric rose 3.3 percent in the third quarter. Analysts were expecting 2.8 percent growth.

Macy's stock trades have been turbulent as investors digest the news. Initial pre-market trading showed the stock was up nearly 5 percent from yesterday's close of $35.79. But it was down 60 cents at the opening bell fell to $34.74 by Noon, down 3 percent on the day.

One reason for the drift might be the lack of conclusive evidence that Macy's resurgence is sustainable.

Macy's told investors to expect full-year earnings per share of up to $4.30 this year. That's 15 cents better than the company's previous guidance. But it did not forecast an increase in comparable-store sales for the full year. Despite the strong third-quarter performance, comp-store guidance still stands at up to 2.5 percent.

After three years of store closures, Macy’s has been reinvesting in its remaining fleet of 650 stores. The Kenwood Towne Centre store was among 50 locations that shared $200 million in upgrades this year. At same time, Macy’s has re-charged lower-performing stores by testing new retail strategies, including its discount-format Backstage, which is now available at Macy’s Tri-County and Anderson Township stores.

But the company isn’t done with downsizing. In an interview with the Wall Street Journal, Gennette said Macy’s is testing a plan to shrink underperforming stores by closing off sections and cutting staff to operate the remaining space.

“If your store is too big and your dollars per square feet are too low and you can’t lease the space to someone else, then you’ve got to hive off a floor,” Gennette told the Journal. “If we were building stores today, we’d build them smaller.”

Gennette told analysts that Macy's is separate its stores into three buckets, including flagship stores like Herald Square and ten others that represent "the best that Macy's has to offer" in terms of product selection, entertainment, food and events.

A second bucket involves magnet stores, when tend to draw more shoppers with broader merchandise selections and more service offerings. Macy's Kenwood location is one of 50 stores now designated as magnets. The list will grow to 150 next year and Macy's will invest up to $300 million in those stores to improve their operations.

The third bucket involves neighborhood stores, which are profitable locations where Macy's wants to improve operating efficiency. That could include closing off space, leasing space to other retail concepts or converting sales floors to fulfillment centers for e-commerce orders.

"We are currently testing four different investment models for our neighborhood stores that are aimed at increasing shopping ease and convenience including more self-service options," Gennette told Wall Street analysts Wednesday. "And in 2019 we will test and iterate until we land on the right formula to scale the neighborhood stores in our fleet."

Macy's declined to comment on what the changes will mean for Cincinnati stores.