Brick-and-mortar retail sinks artfully into coma.
It’s been a tough quarter for Macy’s. Again. Sales dropped 4% to $5.87 billion in the second quarter, it reported today. It had already closed 41 “underperforming Macy’s stores” in its fiscal year 2015. So among the remaining company-owned stores, comparable sales fell 2.6%. Operating income plunged 73% to $117 million. Net income plummeted 95% to a nearly invisible $11 million, or 3 cents a share.
The first quarter, on a year-over-year basis, was even worse. So for the first half, sales dropped 5.7%, operating income 53%, and net income 82%.
“We are encouraged by the distinct improvement in our sales and earnings trend in the second quarter,” is how CEO Terry Lundgren explained the phenomenon. He even gave credit to “a normalized weather pattern” – rather than blaming the weather, as is normally the case. And tourist spending dropped again, but less than before.
Then came the music to Wall Street’s ears.
In a separate statement, Macy’s announced that it would be “reallocating investments to highest-growth-potential store and digital businesses, and capitalizing on opportunities within the company’s real estate assets.” These changes “represent an advancement in our thinking on the role of stores….”
What this corporate speak means in numbers is this: It will shutter “approximately” 100 Macy’s full-line stores, or about 15% of its current 675 full-line stores. Final decisions which stores to close haven’t been made yet, it said. Most of this will happen in early 2017.
And there’s a real estate angle, testament to the breath-taking commercial property bubble that has transpired across the US, and particularly in large urban markets. It’s going to shutter “a number of stores” and sell the locations because the “value of the real estate exceeds their value to Macy’s as a retail store.”
One of them is the Macy’s Men’s Store on Union Square in San Francisco, a fabulously expensive location. It’s a big store, with a number of floors. You don’t have to wind past perfumes, bras, stockings, and handbags to get to the escalators or the underwear section. It’s a little threadbare, but who cares. I treat shopping like I treat unpleasant jobs around the house, such as replacing tile grout in the shower. When I finally decide to do it, I make a plan, and I execute the plan as efficiently as possible. That store allows me to get in, get my business done, and get out.
But that’s not what Macy’s wants. It wants me to wander past bras and perfumes apparently. So it’s “in negotiations” to sell the property. If the deal goes through, the big men’s store will be shuttered, and merchandise will be crammed into a floor or so in “a comprehensive and compelling men’s shopping experience” at the women’s store across the street. Surely, men can find other suppliers for their stuff, like online.
Macy’s figured that out too. Online retailers are eating its lunch. Amazon is cleaning house. Millennials, the customers that Macy’s really, really needs, are shopping online. And so Macy’s will try to gravitate that way and “invest in growth sooner and more aggressively in digital and mobile.”
Given all these store closings, the already declining sales will be “somewhat smaller” still – by about another $1 billion!
But as miserable as 3 cents a share in net earnings is, Macy’s couldn’t leave it at that. So it adjusted its earnings by removing the biggest bad items, such as the costs of closing stores and axing employees – which is not a one-time item but part of its regular business model these days – and the costs of the retirement plan settlement.
Thus, it managed to pump up its adjusted fictional ex-bad-items earnings to 54 cents a share, easily blowing past analysts’ expectations of 48 cents a share. But the most positive thing must have been the layoffs and store closings coming down the pike. That always sells on Wall Street.
And Macy’s shares soared 17% today. You’d think Microsoft had made one of its wild-and-woolly buyout offers, or something. But shares are still down 45% from their peak during the glory days of mere sales stagnation in July last year.
These store closings, and those over the past few years – in total nearly 200 – show that Macy’s is trying to shift its footprint out of brick-and-mortar retail into online and mobile. They’re all trying to do it, spread over years. Brick-and-mortar retail is sinking into a coma, artfully dressed in corporate speak and “adjusted” accounting figures to cover up declining sales and plunging earnings.
It’s really tough out there. American consumers are squeezed. The shift to online has been brutal. Numerous retail chains have already taken refuge in bankruptcy. Private equity firms, which thought that retail was the best thing since sliced bread and bought out numerous retailers, are now getting burned. Read… Another Leveraged Buyout of a Retailer Bites the Dust
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