Retailer lifts its profit, yet shares tumble 16% as analysts question pace of revival efforts

By Suzanne Kapner 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 16, 2018).

Macy's Inc. has been investing in stores and upgrading its online operations, but its efforts haven't been enough to overcome an inconvenient fact: It is still a department store.

On Wednesday the company reported second-quarter results that as one analyst said "checked all the boxes," yet its share price tumbled 16% in response. The stock had rallied 66% this year through Tuesday's close. But the selloff seemed to indicate more than just the usual frustration that sales and earnings should have been better.

"I'm not a believer that Macy's is a long-term winner in retailing," said Paul Lejuez, a Citi analyst. "Department stores are structurally disadvantaged. When you are selling other people's merchandise, that is not a good spot."

In an interview, Macy's Chief Executive Jeff Gennette countered that the company after several years of declining sales had returned to growth. "Look at where our stock was in November and where it is now," he said. "Clearly, we have some believers out there."

Same-store sales, including licensed departments, rose 0.5% for the quarter ended Aug. 4, compared with the same quarter the previous year. Excluding the shift of a promotional event to the first quarter, the company said comparable sales rose 2.9% including licensed departments.

Total sales for the latest quarter fell 1.1% to $5.57 billion, in part because of stores that were closed last year. Profit rose 50% to $166 million, compared with $111 million a year earlier. Macy's also raised its sales and earnings guidance for the year.

The shares fell $6.67 to $35.15, and some analysts said the company wasn't moving fast enough in its turnaround efforts. Macy's and other battered retail stocks have rallied in the past year amid signs that sales declines had stabilized and investor fears about the shift to online shopping eased.

Overall, U.S. retail sales have been rising this year, buoyed by increased consumer spending and a strong U.S. economy. Other retailers, including Home Depot Inc. and Coach owner Tapestry Inc., have reported strong demand this week. On Thursday, investors will get another test when Walmart Inc. reports its latest results.

Macy's has been remodeling roughly 50 stores to include food offerings and upgraded fixtures. It has also added Macy's Backstage, an off-price concept, to its department stores. It rolled out a new loyalty program that offers special services to its best customers such as previews of Broadway plays. And it is adding to its online offerings with a program in which vendors ship directly to shoppers.

Mr. Gennette said the revamped loyalty program has added one million new shoppers, and that the retailer's existing best customers are spending roughly 8% more with the program. He said customers who shop both its Backstage and regular department stores spend 33% more with the chain.

On a conference call, he told analysts the investments in brick-and-mortar stores were a big driver of the company's improved results and that Macy's had lined up the next batch of 50 stores to get special treatment such as extra sales staff and remodeled dressing rooms.

"It is early innings, but I feel good about the progress we've made," said Mr. Gennette, a Macy's veteran who took over as CEO in March 2017.

Macy's, like other department stores, continues to face its share of challenges. The department-store category as a percentage of overall retail sales has declined for decades, losing share to discount, off-price and fast-fashion chains.

While Macy's has tried to be proactive, some analysts worry it isn't moving fast enough. The company operates about 690 department stores under the nameplates Macy's and Bloomingdale's. Yet, only a fraction of those locations are getting a face-lift. That has left many stores and departments with a "down-at-the-heels feel," according to Neil Saunders, managing director of GlobalData Retail, a consulting firm.

Mr. Saunders also said growth at Macy's is below that of the overall retail market and that the company continues to lose market share in a number of categories. One category is cosmetics, an area that department stores used to dominate. But the chains have lost their hold now that most major brands sell to beauty retailers Sephora and Ulta, as well as through their own stores and websites.

Macy's has reacted by adding younger, edgier brands to its lineup and transforming portions of its cosmetics departments into so-called open-sell formats, where shoppers can browse across different brands.

Mr. Gennette said Macy's is making investments in all its stores, not just its best locations, by adding service desks and mobile checkout. As for the cosmetics overhaul, he said it is a work in progress. "We are narrowing the share loss," he said, adding that the company is winning share in fragrances.

The company, which also operates 170 specialty stores that include Bloomingdale's The Outlet, Bluemercury, Macy's Backstage and Story, raised its outlook for total sales and profit for its fiscal year, a sign that it expects continued gains in the critical holiday period. Same-store sales including licensed departments are expected to increase by a range of 2.1% to 2.5% for the year.

--Aisha Al-Muslim contributed to this article.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

August 16, 2018 02:47 ET (06:47 GMT)

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