These Trends Are Why Macy’s Beat Wall Street Estimates

Macy’s Inc. said customers are both shopping more frequently and newly engaging with its core retail brand, prompting the department store icon to raise its 2021 guidance after first-quarter results topped Wall Street estimates.

In a Nutshell: Macy’s reported 4.6 million new customers shopping the eponymous brand, 23 percent above 2019 levels. The retail brand, along with sisters Bloomingdale’s and beauty-centric Bluemercury, all outperformed, the company said, with strong fourth-quarter trends spilling into Q1. It credited federal stimulus funds, economic reopenings and vaccinations with bolstering consumer spending.

“As consumers seek to re-engage with each other, we are seeing promising signs that our core customers are shopping again, and we continue to attract new customers, who increasingly begin their shopping experience with us online,” chairman and CEO Jeff Gennette said in a statement. “Customers are shopping categories that have been strong throughout the pandemic, including home, fine jewelry and watches, fragrance and luxury items. And we’re encouraged by the improvement we’re seeing in special occasion categories as customers begin to travel and return to a pre-pandemic lifestyle.” He noted “emerging opportunities” in new categories and brands from toys and health & wellness to pet and home décor.

Gennette told Wall Street analysts that “consumers are ready to get out, reconnect with family and friends, and celebrate life,” after their social lives were curtailed for more than a year.

“We’re seeing record customers coming back to shop, and they’re spending more,” he said. Average customer spend is 10 percent higher in Q1 versus the same period in 2019, with the average number of visits per customer up and the average unit retail up 7 percent.

Genette credited Macy’s evolving Polaris turnaround plan with supporting the digital efforts that served customers—and the company’s bottom line—throughout the pandemic.

Home categories, Gennette added, are driving growth in textiles and furniture, while sleepwear—more than half of which is private brands—performed well, too.

At Bloomingdale’s, sunglasses and luxury handbags resonated with customers, while Macy’s saw improving consumer demand for apparel.

“As the weather warms up and vaccines are more readily available, customers are feeling increasingly confident to get dressed up and venture outside. They’re also starting to attend events again. Accordingly, we’re seeing an improvement in dresses, those special occasion [events] like prom, mother of the bride, and casual. At Bloomingdale’s, we see signs of improvement in dresses and dressy sandals. We’re also experiencing a similar increase on the men’s side of the business in tailored clothing,” Gennette said. “We are ready for the shift, and we will continue to take a balanced approach in our assortment. Denim is another area that is improving across styles and price points.”

Gennette said the kid’s business also improved, driven by Easter and a return to in-person instruction in many schools. Across Macy’s and Bloomingdale’s, the company is seeing trend growth in shoes and handbags. “As consumers start to travel again, they’re shopping our brands to prepare for their trips, including warm weather standout categories like sandals, swim, and luggage,” he said.

In addition to adding “hundreds of new brands and categories in apparel, home and beauty over the past year to capture additional spend from new and existing customers, Macy’s is working with data metrics as part of its Polaris plan to improve pricing science and reduce promotions to get better sell throughs and higher merchandise margins,” Gennette said.

“We continue to update our supply chain infrastructure and network while leveraging improved data analytics capabilities in our fulfillment strategy. Continuing supply chain disruptions across the entire retail industry are impacting our inventory levels and causing delays across subcategories. We’re navigating the disruption by adjusting our freight strategies, working closely with our overseas carriers and brand partners and pushing for earlier deliveries. We’re cautiously optimistic that the port delays will improve this summer,” Gennette said.

While the retail giant is hyperfocused on younger millennials, it is also looking at new income streams like Macy’s Media Network, which monetizes digital traffic. Gennette said the network, launched in February, has received “immense support from vendors” and ran 130 vendor-funded advertising programs in Q1. That helped drive a 3-million-plus traffic increase to Macys.com, Gennette said, closing in on a goal of $60 million in revenue for 2021 through the media network. With a greater focus on digital this year, the company is “well on the road to $10 billion” in annual digital volume by 2023.

The company will add 12 more within-Macy’s Backstage stores, bringing the planned total to 47 locations in 2021. So far, 33 have opened in the quarter, bringing the brand total so far to 250 off-price Backstage locations and an expected 270 by the end of 2021. The retailer will also open three new off-mall Market by Macy’s locations as it continues to test the concept, as well as experiment with a small-format concept for Bloomingdale’s in the D.C. metro area.

Adrian Mitchell, chief financial officer, said the company will continue to test and iterate different changes to promotions throughout the year to improve merchandise margin and inventory management. The company has increased the use of regional carriers to allow it improve its delivery rate to customers, Mitchell said. About 20 percent of Macy’s digital sales were fulfilled by stores. Data analytics are informing how to better place inventory at stores and distribution centers, increasing allocation efficiency.

Mitchell said the company started the year with a “healthy stock to sales ratio,” ending the year with balance sheet inventory down 23 percent versus the same quarter in 2019. While some of the decline is due to supply chain challenges, Mitchell said Macy’s “approach to inventory and chasing sales, as opposed to winning every sale at any cost” has been a factor, too.

Management has continued to mitigate risk by deleveraging the balance sheet by rolling over maturing dates for debt for the next four years. The company is “well on the path to returning to investment grade metrics,” Mitchell said.

In addition, the company will explore opportunities to monetize real estate assets, like its office-tower plan for Herald Square.

Net Sales: For the three months ended May 1, net sales jumped 56 percent to $4.71 billion from $3.02 billion. Including credit card revenue of $159 for the period, total revenue was $4.87 billion.

Macy’s said comparable sales rose 62.5 percent from 2020 levels on an owned basis and up 63.9 percent versus 2020 levels on an owned plus licensed basis. Compared with figures from 2019, comparable sales were down 10.5 percent on an owned basis and down 10 percent on an owned plus licensed basis.

Digital sales grow 34 percent versus 2020. The company is currently working to provide specific delivery dates and launching an improved returns experience on the Macy’s app, expected later this year.

Gennette said that by keeping inventory levels lean, the retailer has been able to remove the clutter in stores to provide customers with a more streamlined shopping experience. And while Macy’s expects to see increased domestic tourism, Gennette doesn’t expect international travel to rebound until 2022.

Earnings: Net income was $103 million, or 32 cents a diluted share, against a net loss of $3.58 billion, or $11.53, a year ago. On an adjusted basis, diluted earnings per share totaled 39 cents.

Wall Street was expecting an adjusted diluted loss per share of 41 cents on revenue of $4.37 billion.

Mitchell said the company expects fiscal 2021 net sales to be between $21.7 billion to 22.2 billion, with digital contributing $8 billion of the sales to the total figure. Adjusted diluted earnings per share was guided to a range of $1.71 to $2.12. That compares with prior 2021 guidance of net sales between $19.75 to $20.75 billion, with adjusted diluted EPS of between 40 cents to 90 cents.

For the second quarter, the CFO said net sales are forecasted at $4.9 to $5.0 billion, with adjusted diluted EPS between 3 cents to 12 cents.

For the first quarter of 2022, the company expects to receive an income tax refund associated with the carry back of 2020 net operating losses allowed under the Cares Act, estimated at $520 million.

CEO’s Take: “As we look to the rest of the year, we are hyper-focused on meeting consumers’ demand for speed, convenience and a seamless omnichannel shopping experience. We also continue to evolve our merchandising strategy, and we remain a partner of choice for top brands with more collaborative and profitable vendor relationships,” Gennette said. “With a healthier economy and the reopening of communities as the backdrop to the execution of our Polaris strategy, we are well positioned to deliver sustainable, profitable growth in 2021 and the years beyond.”