Retailer fared better than expected, bolstered by off-price and luxury, but that isn’t enough to start celebrating.
By guest author Jinjoo Lee from Wall Street Journal
Macy’s performed better than expected last quarter, but investors piling into the struggling retailer might as well be hoping for a miracle.
Net sales at Macy’s declined 35.8 % in the quarter ended Aug. 1, bolstered by online sales, which was better than the 37 % drop that analysts had estimated. The net loss was also a better-than-expected USD 431 million. The company’s shares jumped 5 % Wednesday, September 2, 2020 morning.
Opposite ends of the cost spectrum shined: Backstage—Macy’s off-price segment—and luxury goods at Bloomingdale’s did particularly well, reflecting the polarized financial reality of consumers today. Those that would have shopped full price are seeking value, while more affluent consumers, spending less on travel and experiences, have instead shifted their attention to physical luxuries.
Macy’s is continuing with its strategy to improve profitability, including plans to close 125 underperforming stores through 2022. Whatever its next steps are, recovery will be slow. Though Macy’s has been pruning its store fleet for some time, return on invested capital last year, before the pandemic, declined to a level that had not been seen since the 2008-2010 recession. Plus, as Macy’s Chief Executive Jeff Gennette himself previously noted, closing a store generally means “firing a customer.”
The challenge for Macy’s is only magnified because of the USD 4.5 billion of debt it took on last quarter to keep its business afloat. Servicing those borrowings will absorb a hefty chunk of the cash flow it needs to improve the business.
No wonder its shares pared early gains on Wednesday. Macy’s pulled off an impressive quarter given the circumstances, but it was a slowly sinking ship before the pandemic and is now listing badly.