The U.S. department store chain Macy’s, Inc. (NYSE:M) sold more winter clothing in January than December. The El Niño effect that slowed sales in the pre-Christmas season gave way to freezing temperatures. Customers started to flock to stores in search of sweaters and parkas. Macy’s stock rose some four percent on February 23, after the retailer delivered better-than-expected results for the fourth quarter of 2015.
Indeed, Macy’s stock soared less because of a lift from sales, which were down five percent, and more because of analysts’ having had overly gloomy outlooks. Macy’s did not have a good 2015. The group suffered consecutive months of losses. Macy’s has also opened up to partnership ideas to manage its considerable property portfolio, including the flagship store on 34th Street in Manhattan, one of New York City’s most popular attractions.
Macy’s made bold cuts. It put flagship stores in San Francisco, Chicago, and Minneapolis on the block. Macy’s, which also owns Bloomingdale’s stores, also cut its staff numbers. Yet Macy’s stock, given its retail business, is prone to shocks in the period after the Christmas holidays, affected by good or bad sales.
In 2015, Macy’s had poor sales; they fell 5.2% from November to December, which is the opposite of what should have happened during the year’s most important period for revenue. This has forced it to lower its financial goals. Jeff Smith, the activist investor at Starboard Value, has urged Macy’s to exploit its attractive real estate portfolio to drum up the numbers. (Source: “Take that, Donald Trump? Macy’s making a comeback,” CNN Money, February 23, 2016.)
Jeff Smith may have a point. Retail analysts have criticized Macy’s for failing to maintain service standards. Many of its stores are reportedly poorly merchandised with mediocre customer service: “Macy’s is increasingly running a discount operation while trying to charge traditional department store prices,” Smith added. (Source: Ibid.) Starboard Value, an activist investment fund, has urged Macy’s to sell its real estate assets, which it believes would fetch some $21.0 billion.
So far, Macy’s CEO Terry Lundgren has avoided embarking on the major real estate investment trust (REIT) sell-off that Starboard Value proposes. Instead, he is still confident that Macy’s will improve with retail. Lundgren has adopted a new strategy, baptized M.O.M: My Macy’s (personalized shopping experiences), Omnichannel (Internet and mobile shopping), and Magic Connections (customer loyalty and engagement schemes). The CEO believes this is the formula to regain market share. (Source: “Macy’s reports mixed Q4 with less-than-expected sales drop,” Retail Dive, February 23, 2016.) Given the four-percent jolt on Wall Street, Macy’s investors trust Lundgren.
Macy’s stock opened the New Year’s trading at a 52-week low of $34.87. But it is trading at more than $42.00 now. Macy’s stock has treaded in rougher patches. In January 2011, it hit a five-year low of $22.82.
The strong U.S. dollar, which is beyond Macy’s control (unlike customer service and merchandising standards), has made tourists more miserly. This compounded the bearish El Niño effect on winter fashions. Macy’s also suffered from overly favorable expectations. The 2013 and 2014 fall/winter seasons were freezing in the Northeastern USA. Macy’s may have accumulated higher-than-normal inventories of winter apparel in expectation of similar sales patterns in fall/winter 2015.
The Macy’s executive is confident about the company’s turnaround plan and investors are bullish. Macy’s could just pull off adapting to consumers’ different shopping habits. Any evidence of success in the next quarter will reaffirm the strategy and could send Macy’s to the $60.00–$70.00 range—levels it hasn’t seen since last summer.