Despite Wall Street’s Ebullience, Macy’s Turnaround Strategy Continues To Go Nowhere.

I was intrigued by Wall Street’s ebullient take on Macy’s quarterly earnings announcement this morning. The stock closed up 15% on Thursday as the department store chain beat expectations and, unlike quite a few other retailers, did not lower guidance.

As a BS-dispelling enthusiast I, however, was especially fascinated by Macy’s CEO Jeff Gennette’s opening statement in the press release that accompanied the earnings news: “Our Polaris strategy is working.” Really?

Running to stand still

Taking a quick look at the facts, Macy’s reported quarterly net sales of $5.2 billion, down 3.9% year over year and up an anemic 1.1% versus the third quarter of 2019 (right before they announced their Polaris Strategy). Various measures of profitability (net income, EBITDA, EPS) are all down dramatically compared to last year. For the first 39 weeks of the fiscal year, Macy’s net income percentage was 4.1%. Dillard’s, which has a substantially similar consumer value proposition, was 12.7%. Dillard’s also had an 8% comparable store sales increase and now has a virtually identical market cap, despite being much smaller. But I digress.

Better is not the same as good

A lot is being made of Macy’s inventory discipline—which is objectively strong—and performance relative to Kohl’s (which reported a train wreck of a quarter and yanked guidance) and TargetTGT
, which is a pretty different business model. Nevertheless, despite their dismal quarter and lingering issues moving through an inventory glut, Target has gained considerable market share during the last few years, whereas Macy’s has treaded water. And all of this comes in the face of its direct competitors having closed many hundred of stores.

The reality distortion field

Macy’s has a long history of making bold claims about innovative strategies while mostly delivering a heaping pile of nothingness. Terry Lundgren, Jeff Gennette’s predecessor, championed “omni-channel” and the “My Macy’s” inventory localization program, among many other efforts that barely moved the dial during his 14 year tenure.

Mr. Gennette has launched off-the-mall concepts like “Backstage” and the confusingly named “Market by Macy’s,” along with rolling out Toys R Us shops, acquiring Story (which seemed destined to failure from the jump, as the kids say), and updating the company’s rewards program.

Despite all of this, Macy’s sales are lower today than they were a decade ago.

The biggest departure from reality, however, was Mr. Gennette’s statement in the press release that “retail is detail, and our talented and agile team are executing well to compete.” I am more than willing to believe that his team is talented and working very hard. Yet while Macy’s inventory pivot seems to be working out, the company’s store level executional failures are well documented by my colleague Neil Saunders regular store visits, and completely align with my own experience during recent trips to multiple Macy’s stores.

We’d all love to see the (compelling) plan

For many years I’ve been warning about the collapse of the unremarkable middle and been critical of retailers who think that a slightly better version of mediocre can possibly result in a winning strategy. Sadly, Macy’s continues to execute a timid transformation.

While Macy’s should be applauded for taking more risk than many of their department store brethren, there is little evidence that anything they are doing will meaningfully alter their trajectory. Moreover, the department store sector is now well into its third decade of sustained decline. Any plans must very clearly lay out how Macy’s will grab substantially greater share of wallet and market share than they have done in recent memory, all while improving margin performance. A near-term challenging macro-environment is not going to make an already nearly impossible job any easier.

It’s not the critic who counts

Of course, it’s pretty easy to point out what’s wrong. It’s harder to offer a prescription for change. But Neil Saunders and I recently gave it a go.

When the tide goes out.

Given Macy’s seemingly strong inventory position going into the peak of the holiday season, it may turn out that their performance compares favorably to competitors who are forced to take huge markdowns.

But we should not lose sight of the virtual certainty that 2023 will be brutal relative to a recent past where unusually high consumer discretionary income and related spending made even lackluster brands look fairly bright and shiny. We’d be wise to remember Warren Buffet’s admonition that “when the tide goes out, you see who is swimming naked.”