Macy’s Is a Case Study in Covid Retail Pain
(Bloomberg Opinion) -- The pandemic has roiled the entire retail industry. Macy’s Inc. is getting hit from all sides.
The storied department store chain gets a major share of its sales from clothing, a category where demand has been decimated. It counts urban flagship stores among its crown jewels, but those locations are ghost towns as tourism has evaporated and workers have been slow to return to downtown offices. And while big-box stores were able to get an instant pandemic bump from the curbside pickup programs that they had been fine-tuning for years and are now in such demand, Macy's had to scramble to roll out its own.
Those disadvantages showed in its third-quarter earnings report. Macy’s reported that comparable sales fell 21% from a year earlier. The retailer sought to cast the results in a favorable light, pointing out it that its Ebitda turned positive earlier than expected and that gross margin had improved from the previous quarter because of smaller markdowns and better sales of full-price items. Executives also noted that many of the new customers that came to its website in the second quarter returned in the third quarter, a hopeful signal because many in that group were younger and more diverse than Macy’s typical shopper.
But Macy’s troubles overshadow the improvements. Comparable sales were significantly worse than the 13% decrease reported by Kohl’s Corp. or the 5% decrease reported by TJX Cos. That suggests its close rivals are doing a better job of driving customers to their physical stores. This might reflect the fact that Kohl’s, Marshalls and T.J. Maxx stores tend to be in strip centers, rather than enclosed malls, a format that might feel safer to many shoppers amid the pandemic. Whatever the reason, it does not bode well for Macy’s ability to retain or reclaim market share whenever the health crisis recedes.
If Macy’s digital sales growth had been blockbuster, it might have assuaged some worries about its ability to quickly get shoppers to return to brick-and-mortar stores. But that’s now how things played out. Online sales rose 27% from last year. That’s not terrible, and it is comparable to the 25% digital growth reported at Kohl’s. But it marks a serious slowdown from the second quarter, when digital growth was 53%. But Macy’s is projecting its full-year digital sales will increase “low- to mid-teens” in a year when the wider U.S. e-commerce market is expected to grow 32.4%. That suggests it is struggling to benefit from the pandemic-fueled explosion of online shopping to the same extent as others in the industry.
Also, Macy’s faces some unenviable decisions around its store portfolio. It had committed back in February to closing 125 stores, locations it has dubbed “neighborhood stores” that tend to be in small, struggling malls. That still seems like the right move over the long term, given that these outposts contributed little to the company’s sales and were sullying the Macy’s brand. However, executives have said these stores are holding up reasonably well n the pandemic, perhaps because shoppers find it easier to practice social distancing in these relatively uncrowded locations. At the same time, the urban flagships that are important to Macy’s long-term future are now among the worst-performing in the fleet, thanks to declines in tourism and commuting to offices. That might mean it makes sense for Macy’s to slow down the closings of the neighborhood stores, but it’s difficult to know exactly how long to hold onto these locations given the uncertain nature of the public-health situation.
Macy’s has some things going for it, including a home-goods department that should hold up well amid stay-at-home living and exposure to the resilient luxury market through its Bloomingdale’s chain. But its third-quarter results did little to suggest it will bounce back quickly from the pandemic’s devastation.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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