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Macy's (M) Outlines Strategy to Fit in Dynamic Retail Space

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Macy's, Inc. M has been in a spot of bother for quite some time, thanks to soft mall traffic due to increasing online shopping and stiff competition. Industry experts even pointed out that the company has been scrambling to keep pace with the fast-changing fashion trends and also scored lower in offering customers a better bargain option. But these may be things of past, as Macy's has outlined plans under its three-year Polaris Strategy to adapt better to the new retail ecosystem.

From revamping stores to bringing in loyalty program, from embracing new technologies to investments in merchandising strategies, and from improving websites and mobile apps to supply chain modernization, Macy’s is looking at every nook and cranny to be more agile. Management is taking every step to increase sales, profitability and cash flows. This also includes trimming of 2,000 positions or approximately 9% of its corporate and support function headcount.

Notably, the company’s sustained focus on price optimization, merchandise planning and private label offering should facilitate in meeting customer-oriented demand. As part of its strategy, the company is committed toward building four $1 billion power private brands. Moreover, to better engage with customers, the company plans to launch the next phase of Macy’s Star Rewards Loyalty program later this month.

Macy's, Inc. Price, Consensus and EPS Surprise

Apart from these, Macy’s is evaluating store portfolio. The company plans to shutter roughly 125 stores in lower tier malls within three years that are least productive, and upgrade the remaining by applying Growth treatment. The treatment, which comprises merchandising strategies, technology improvements, talent and local marketing, has been applied to 150 stores to date.

As part of its store growth strategy, Macy’s plans to expand its off-price chains, Backstage and Bloomingdale’s The Outlet. The company intends to open an additional 50 Backstage store-within-store locations and seven additional freestanding, off-mall Backstage stores this year. Moreover, it also testing a new store format, Market by Macy’s, which is smaller in size than an average Macy’s store. These new prototype stores will be located off-mall in lifestyle centers.

Clearly, Macy’s has undertaken a strategic review of business operating model to bring itself back on growth trajectory. The company highlighted that Polaris strategy will help attain gross savings of $600 million in the current year and $1.5 billion annually by 2022.

Management also announced $8.3 billion and $24.5 billion in net sales for the fourth quarter and fiscal 2019, respectively. It also stated that comparable sales on an owned plus licensed basis declined 0.5% and 0.7%, during the respective periods. The company now envisions fiscal 2019 earnings to be near the upper end of the earlier guided range of $2.57 to $2.77 per share.

For fiscal 2020, Macy’s now projects net sales between $23.6 billion and $23.9 billion and comparable sales on an owned plus licensed basis to decline in the band of 1.5-2.5%. The company estimates adjusted earnings in the range of $2.20-$2.40 per share.

Management hinted that comparable sales are expected to remain under pressure in fiscal 2020 on account of business trajectory in the past six months, and anticipation of continued challenges in mall-based retail and disruption as a result of to the implementation of the Polaris strategy. Planned store closures are also likely to hit sales.

Quite apparent, the near-term outlook fails to boost confidence. However, if we look at the company’s three-year financial targets it buoys optimism. Macy’s envisions net sales in the range of $23.2-$23.9 billion and comparable sales on an owned plus licensed basis to be down 1% to flat by fiscal 2022. Moreover, it anticipates adjusted earnings between $2.50 and $3.00 per share.

In the past six months, shares of this Zacks Rank #3 (Hold) company have lost 21%, compared with the industry’s decline of 17.8%.

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