Macy's on Tuesday said that its fourth quarter results beat expectations thanks to what CEO Jeff Gennette told analysts was "solid holiday demand." Net sales in the period fell 19% year over year to $6.8 billion, as comps fell 17%. Net income tumbled 53% to $160 million, but it was the first time in 2020 that Macy's was in the black.
Online sales rose 21% from 2019, reaching 44% of net sales, and are on the path to reach $10 billion in three years, according to a company press release.
For the full year, Macy's swung to a net loss of $3.9 billion, from $564 million in net income in 2019. Net sales last year reached $17.3 billion, from $24.6 billion the year before.
Macy's has joined Nordstrom in betting on digital growth and off-price sales, a departure from what for many decades was a brick-and-mortar business centered on customer service.
Executives said they've "updated and accelerated" the department store's Polaris turnaround strategy, which was unveiled a year ago but derailed by the pandemic. Along with reaching $10 billion in digital sales, that channel will become more profitable, aided by stores that function as fulfillment centers and pickup points, Gennette said. About a quarter of the holiday period's e-commerce sales were fulfilled by stores, the company said.
Like Nordstrom, Macy's also plans to increase drop-shipping in an effort to boost margins in e-commerce, where, executives said Tuesday, delivery costs have been the biggest drain on profits. In what appears to be a renewed effort in scaling its Backstage off-price operations, Macy's will face Nordstrom's mature Rack, along with formidable players TJX Cos., Ross and Burlington. Launched in 2015 as in-store shops and now running six stand-alone stores, Backstage will expand to "close to 300" Macy's stores and once again begin opening stand-alone locations, executives said.
Macy's will continue testing strip-center locations, a reality that will only be a further drag on lower-tier malls. Once the retailer finishes shutting down 125 stores, permanent closures announced last year, at least 85% of its sales will come from A and B mall stores, Gennette said during a morning conference call.
The holidays gave Macy's a much-needed lift, with traffic up and home, jewelry and beauty among the best performing categories, while apparel sales suffered. Moody's analyst Christina Boni warned in emailed comments that "Department stores remain in the eye of the storm as mall traffic and apparel demand remain weak, trends that we expect to continue at least through the first half of 2021."
Executives see that picking up in the second half of the year, with consumers refreshing their closets as they return to more normal activities and special events. That may be wishful thinking, however, in part because such a return remains uncertain. And because of what GlobalData Managing Director Neil Saunder deems poor merchandising in stores and, ultimately, the incremental nature of its turnaround.
"One of the big problems with Macy's is that management seems to be in denial about how bad the situation is on the ground. It is almost as if they never visit stores outside of the big flagship locations," Saunders said by email. "Given the dire state of some shops this is a shocking state of affairs. There are only two conclusions. One, that management does understand the issue but doesn't really want to flag it in public. Two, that they genuinely don't realize how bad things are. Either way, there is a failure of leadership."
Otherwise, Macy's plans sound promising, especially given their holiday results, which beat most expectations, according to Forrester Principal Analyst, Digital Business Strategy Brendan Witcher. "Macy's results show they are better running their business with more rigor than they did for the bulk of 2019 – impressive given the challenges they faced," he said by email. "The long-term positive indicators that shows Macy's strategy and position in the marketplace is moving in the right direction include the six million new digital customers they acquired, the lift in web visits and conversion rates online, as well as the ability to serve customers with omnichannel services."
Executing Polaris will be a real test for the iconic retailer, which has pulled the plug on some of its more creative endeavors, like Story, among other false starts over the years, Saunders said. Moreover, the Polaris plans aren't very bold, yet that may be required, he said.
"They never set out a totally new vision for the company, everything is always about moving in small increments. But the retail market isn't changing in increments, it is changing by leaps and bounds," Saunders said. "Companies that get this, like Target, Walmart and Amazon, are ambitious. Macy's is not. It is a company that seems to want to manage decline rather than aim for greatness."