Macy’s New Strategy Overshadowed by Full Year Guidance Update

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Photo credit: Macy’s

Macy’s announced Tuesday that its gross margin for 2017 could fall to as much as 80 basis points lower than last year.

CFO Karen Hoguet warned that the full year gross margin could be 60 to 80 basis points lower than 2016, and that second quarter margin would be off by 100 basis points compared to the previous year period, according to Reuters. That news seems to be the only thing Wall Street took away from the retailers’ June 6 investor meeting, and company stocks dropped to five-year lows on the announcement.

The second quarter 2016 gross margin was 40.9%, while full fiscal year 2016 gross margin was 39.4%.

The retailer, which operates its namesake locations as well as Bloomingdale’s, has been pressured by sales declines into closing stores, selling real estate and generally looking for ways to cut costs in an effort to hunker down during the current retail firestorm. To become more competitive and chase two sectors that are fired up, it has also been ramping up its rollout of additional Bluemercury locations, adding both freestanding and shop-in-shops, as well as co-located Backstage off-price concepts.

Despite the bad news, which came late in the presentation, Macy’s maintained an optimistic outlook pinned to its new five-point plan, dubbed the North Star Strategy. The first pillar, From Familiar to Favorite, is designed to re-engineer the company’s marketing efforts.

Marketing

Brand awareness isn’t an issue for the retailer, as demonstrated by the fact that one in two Americans shop Macy’s stores and 1.5 billion consumers that visit the company’s website annually. The challenge is upping shoppers’ inclination for choosing Macy’s over all others. While 70 percent of consumers ages 18 to 35 and 68 percent of shoppers ages 36 to 65 say they love the Macy’s brand, only 45 percent and 37 percent, respectively, say its their favorite store to shop.

Bridging that gap is the goal of the company’s new marketing campaigns, which will aim for a younger demographic with pitches that have a stronger call to action. To do so, Macy’s is on a quest to better understand its consumers’ demographics, behaviors and attitudes. The retailer also plans to use consumer data to create and test campaigns

Currently, the store’s top 9 percent of fans visit 18 times a year and spend an average of $2,010 annually, accounting for 46 percent of sales. Meanwhile 13 percent of consumers visit nine times and spend $574. At the bottom rung are the 38 percent who visit only three times a year and spend just $246.

Rather than rely on events, as it has in the past, Macy’s is focused on forging an emotional connection to help move consumers to the top tier of spendy shoppers. By Q3, the retailer will introduce a revamped, mobile-centric loyalty program that’s simplified and incentivizes changes in behavior; tentpole campaigns centered around the four seasons; and cross-platform social and web content.

Product

Edit. Elevated. Exclusive. Those are the three words driving Macy’s assortment going forward. That plus the company’s Backstage off-price concept are the keys to It Must Be Macy’s, the second pillar of its North Star Strategy. The plan focuses on weeding out duplicate items, offering better fashion across locations and online, and tailoring assortments to local areas.

Macy’s looks to boost private brands and exclusives from 29 percent of goods to 40 percent by 2020. Ultimately, the retailer thinks the strategy will boost inventory turns, improve weekly full-price sell throughs and increase target average unit retail (AUR).

With Backstage, the retailer is lifting store business, with the Macy’s locations that house the off-price concept seeing a 4.6  to 6.4 point increases. This is due, at least in part, to the co-locations of the full line and off-price businesses, resulting in a 26 percent overlap in shoppers from one to the other.

Experiences

With Every Experience Matters, Macy’s is focusing on experiences—those that take place remotely, in-store and the ones that cross the virtual and physical worlds. One key to this North Star pillar is buy online, pick up in store. Like many other retailers, Macy’s has found success with this model so it’s looking for ways to mine it for more sales. To do so, the retailer will focus on getting product where it needs to be (availability), ensuring consumers know about the service (awareness) and delivering a convenient easy transaction (experience).

Funding

Funding Our Future, the pillar, is all about value creation. Macy’s will continue in its efforts toward efficiency and effectiveness. Thus far, the company has reduced annual expenses by more than $1.5 billion, with approximately a third reinvested into growth strategies.

With 841 stores and over 130 million square feet, the Macy’s real estate portfolio is substantial. The retailer sees this as a considerable benefit since the majority are owned and ground leased, and 72 percent are located in A rated malls. These locations represent opportunities that include selling off excess floors, fully redeveloping the locations, reducing footprints and a “wrap and hug” development that would see a restaurant or other profitable property attached to a Macy’s store.

The future

What’s New, What’s Next, the fifth and final pillar, pulls all of the elements together and provides the company with a philosophy for remaining open to new opportunities that will push the brand into the “white space” in the retail landscape—whether its through physical or digital concepts, brand partnerships, acquisitions.

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