Despite recent reports that the industry’s holiday season was shaping up to top previous estimates due to success driven by strong online sales and a burst of last-minute purchase, this didn’t help a lot of retailers who couldn’t tide through the storm. One such retailer is Macy’s whose shares tumbled more than 9 per cent after it posted disappointing holiday sales, releasing a list of 68 of the 100 stores that it plans to close. However, the retailer is putting strategies in place to revive from its losses and these strategies primarily concentrate on streamlining its store portfolio and intensifying cost efficiency efforts.
The department store chain Macy’s comparable sales fell 2.1 per cent in November and December, which was at the low end of its previous guidance. Although it maintained its 2016 comparable sales guidance of a 2½ to 3 per cent decline, it expects full-year diluted earnings to be in a range of US $ 2.95 to US $ 3.10, against its previous expectation of US $ 3.15 to US $ 3.40. To wade through losses, the company has announced actions such as closure of 68 stores and the reorganization of the field structure that supports the remaining stores, reinforcing the strategy of fewer stores with better customer service. It also includes the significant restructuring of the retailer’s operations to focus resources on strategic priorities, improve organizational agility and reduce expenses.
Restructuring Store Portfolios
In an attempt to reverse downward sales at its established locations, store closure is an attempt by the retailer to focus on its best-performing locations and the website. As part of a strategy to streamline its portfolio, this move by the retailer will save the company an estimated US $ 550 million a year starting in 2017 as the company plans to use these savings to invest an additional US $ 250 million in its digital business, as well as growth in its Bluemercury beauty shops, Macy’s Backstage off-price stores and China.
In a statement, the company announced, “We are closing locations that are unproductive or are no longer robust shopping destinations due to changes in the local retail shopping landscape, as well as monetizing locations with highly valued real estate. These are never easy decisions, and we are committed to treating associates affected by these closings with respect and transparency.”
Further, the company will close about 30 additional stores over the next few years as leases or operating covenants expire or sale transactions are completed. These actions will bolster the company’s strategy to further invest in omnichannel capabilities, improve customer experience and create shareholder value. The company plans to open 50 more Backstage locations inside existing Macy’s stores and about 50 Bluemercury speciality stores. Apart from this, four new Macy’s and Bloomingdale’s stores are currently planned and/or under construction and new Macy’s and Bloomingdale’s stores are planned to open in Abu Dhabi, and one Bloomingdale’s store is planned to open in Kuwait.
Cost-Efficiency Initiatives
To address the need for greater efficiency and productivity, the retailer would focus on restructuring its central organization with a focus on eliminating layers of management to reduce costs while improving decision making and agility. Macy’s also plans to intensify its efforts to reduce non-payroll costs by achieving lower pricing and reducing consumption to deliver sustainable savings. The retailer would make changes in the way how stores are operated and reduce field infrastructure given the reduced store sales and evolving customer behaviour. These new strategies directed towards savings costs have resulted in the company cutting its workforce by 6200, representing about 7 per cent of its total workforce.
Focus on Real Estate
Continuing to drive shareholder value through ongoing real estate initiative, Macy’s is looking towards a three-prong real estate strategy: flagship assets; closure of approximately 100 stores and creating value for the remaining real estate portfolio. In October, the retailer said it had sold five of its stores to General Growth Properties, including four that were offloaded in the third quarter for US $ 46 million. A month later, it said it had signed a contract to sell its men’s flagship in San Francisco’s Union Square for US $ 250 million. At that time, it also disclosed that it had signed a contract to sell its downtown Portland, Oregon, store for US $ 54 million. As part of the latest round of closures, Macy’s said it has entered into an agreement to sell its downtown Minneapolis store to 601W Companies. This has resulted in approximately US $95 million of cash proceeds and gain recognition of approximately US $ 56 million.
What Next?
Recently, the Wall Street Journal reported that Hudson’s Bay Co., the Canadian owner of Lord & Taylor and Saks Fifth Avenue is in talks to take over Macy’s, which would be a spectacular end to years-long struggle for what was once the star of the retail world. This takeover would be quite a feat for Hudson’s Bay given that its US $ 1.4 billion in market value is a fraction of Macy’s US $ 13.4 billion market capitalization. However, being the shrewd real-estate operator Hudson’s Bay will be more interested in the real estate itself rather than the retail operations.
It still remains to be seen whether this takeover would happen or Macy’s new strategy at play will help the retailer to wade through this storm and revive itself from the shackles of losses that the holiday sales exposed it to.
