Macy’s Prepares For An Unpredictable Future

Macy’s looks at 2022 as an unpredictable year. As a result, CFO Adrian V. Mitchell says that “the biggest challenge that we have had is where the demand is going to come from.”

He went on to say that “We believe the demand is out there and that the consumer will be spending.” The question that is facing the company is whether consumers will be spending their discretionary dollars on airline tickets to Florida or going out to restaurants instead of shopping in stores. In that vein, the consumer is unpredictable at this time. As the result, management is cautious in its planning.

The company is planning for low single digit sales gains in an uncertain environment that has higher inflationary pressures, rising interest rates, and the cost pressures caused by new supply chain disruptions due to the war in Ukraine.

Mitchell outlined several initiatives during the JP Morgan Retail Roundup that was held last Thursday that Macy’s will pursue to counter these marketplace challenges. There are several growth opportunities that he sees. They include:

· Develop new categories of business through their on-line marketplace.

· Engage and retain first time customers who shopped Macy’s last year through personalization efforts that entice them to keep shopping.

· “Infilling” markets with off-mall formats such as ‘Bloomies’, Market by Macy’s, and Backstage.

· Utilize more location-level pricing. This will enable stores to maintain their own level and depth of promotional activities to compete more effectively in their local markets. “While we have five regions, each store can now have a different depth of promotions”.

· Leverage Macy’s media network where vendors can devote marketing dollars to drive sales on Macy’s.com or Bloomingdales.com.

· Step-up efforts to monetize Macy’s real estate. Macy’s now has 10 developers actively looking for opportunities. This is an increase from the five developers previously exploring these possibilities.

Mitchell also indicated that 2022 will be a more promotional year than last year. He conceded that inflation will have an effect on the consumer and a more promotional environment will be needed to attract customers. At the same time, such promotional activity should drive customers to spend their discretionary income in stores rather than on other activities. He went on to say that, by the end of the year, there will be a different pricing structure as well (mentioned earlier as Macy’s starts using more local-level pricing).

Macy’s is targeting a 38% gross margin in 2022 compared to a rate in the mid-30’s in previous years. Mitchell says the company is making more buying decisions based on predictive demand. He also said that SG&A will be higher as the company is investing in more well-trained salespeople and is automating the supply chain. The supply network is decades old, and that automation will come in 2023 and 2024. With all of this going on, shareholders can expect a moderate but growing dividend over time.

POSTSCRIPT: Mr. Mitchell’s concern about inflation is just the tip of an iceberg. The Federal Reserve has promised a repeated raising of interest rates, probably at a .50% clip. It is likely to raise the cost of merchandise and that may force customers who are on a budget to watch Macy’s promotional events very closely. All the initiatives he outlined will also need to work. It looks like it is going to be a tough year.