February 6th, 2016
The iconic department store – Macy’s – seems to be heading towards trouble. It is not just short-term lack of growth that can be blamed on slow growth of the overall economy. Even though the GDP grew at an anemic 0.7% in the fourth quarter of 2015, consumer spending held-up fairly well. The trouble at Macy’s seems to be of the type that could lead to long-term irrelevance. They claim to be an omnichannel retailer, but have so far failed to show innovation and leadership in that area.
Lead with People and Process
Technological change that brought us to this iteration of retail that combines online and brick-and-mortar, is highly disruptive and slows decision making. Alan Murray rightly pointed this out in a recent column and emphasized the fact that “the fundamental challenge of the new industrial revolution is not a technological one, but a human one“. Adding a “pickup in store” button to your web page is just the beginning of a long process in providing an efficient omnichannel retail experience. People and processes need to be streamlined to enhance customer experience and profitability. For example, currently store associates spend an unacceptable amount of time walking back and forth from their point-of-sale counters to the back warehouse to fetch items to customers who placed orders online or who ordered items during Macy’s “Pre-Sale”. The time it takes to serve a customer dramatically increases and throughput decreases. During the holiday season, it becomes very critical for store associates to have quick turn around in serving customers. Frederick Taylor’s Time-and-Motion studies are still relevant today and are applicable to analyzing work processes in a Macy’s store.
Agile Innovation using Technology
Continuous innovation is the new mantra in every industry and retail is no exception. A software solution that you put in place today is quickly redundant within a couple of years. To stay in close touch with the innovation in technology; many retail companies, including Wal*Mart and Kohl’s, have opened technology centers in Silicon Valley.
In my own line of work, I hear a lot about selecting the right platform so that you can have the good, flexible foundation to build your applications. Fortunately, technology approaches such as the software-defined data center (SDDC), open stack, and application delivery approaches such as public or hybrid cloud give you the flexibility to select the right platform and innovate at a faster pace.
Macy’s has been investing in new technology to support omnichannel retail, such as the new RFID-based inventory visibility platform from Tyco. This is a good start but they have a long way to go before they can compete against the likes of Amazon. Amazon has not only moved into brick-and-mortar, but has also been a fast innovator in the retail space. They are experimenting with using their online sales and feedback data to curate products (currently, books) for their physical stores and their ambitions for these physical stores may go well beyond just selling books.
The Numbers that Matter
There has been scant or negative growth in revenue between fiscal years 2012 and 2015 Q3. The 3rd quarter of fiscal year 2015 was a decisive one. Revenue in that quarter fell over 5% compared to the 3rd quarter of fiscal year 2014. Here are the charts depicting revenue per quarter and the growth rates (or lack thereof):
Exhibit 1: Macy’s Revenue Per Quarter Fiscal Years 2012 to Q3 2015
Macy’s had already lowered their fourth quarter earnings per share guidance. Wall Street is speculating that Macy’s is in a negative comps environment. The remedy is to focus on the long-term initiatives that drive customer experience and not on short-term boosters such as real estate monetization.
Exhibit 2: Macy’s Quarterly Year-over-Year Revenue Growth Percentage
(Q1 2013 compared to Q1 2012 and so on)
Basic earnings per share have fallen off a cliff – declining by over 40% in Q3 fiscal year 2015 compared to Q3 fiscal year 2014.
Exhibit 3: Macy’s Basic Earnings Per Share 2012 to Q3 2015 (in USD)
Exhibit 4: Macy’s Growth Rate of Earnings Per Share (%)
Misadventures of Stock Repurchase
Personally, I have never been a supporter of share repurchase programs. It probably gives a short-term boost to their share price and earnings per share, ultimately your brand’s relevance to your customer will decide the long-term value of your company. BlackRock CEO Larry Fink – the world’s largest investor – has written an excellent letter to chief executives of S & P 500 companies regarding the dangers of short-term thinking. He says: “Dividends paid out by S&P 500 companies in 2015 amounted to the highest proportion of their earnings since 2009. As of the end of the third quarter of 2015, buybacks were up 27% over 12 months. We certainly support returning excess cash to shareholders, but not at the expense of value-creating investment. We continue to urge companies to adopt balanced capital plans, appropriate for their respective industries, that support strategies for long-term growth.“
I am aware of the argument for stock repurchases and this article in the Barron’s magazine rekindles the debate between issuing dividends vs. doing stock repurchases. My biggest problem has been that most companies seem to buy when their stock is high and then when the stock drops investors are left wondering if they would have been better off with dividends. Macy’s seem to have done that same mistake.
- Between August 2nd and October 31st, 2015, Macy’s repurchased a total of 16.7 Million shares at an average price of $53.88.
- Between May 3rd and August 1st 2015, Macy’s repurchased a total of 8 Million shares at an average price of $68.69.
- As of February 5th, 2016 the Macy’s stock was trading at $40.30.
Exhibit 5: Macy’s Quarterly Average Basic Shares Outstanding
Exhibit 6: Macy’s Quarter to Quarter Percent Change in Shares Outstanding (Q2 2012 Compared to Q1 2012)
Apparel accounts for about 46% of the revenue for Macy’s. On that front, Amazon is becoming the biggest threat. According to wall street analysts, Amazon is slated to overtake Macy’s as the largest apparel retailer in the U.S. Costco is also becoming a bigger threat. They seem to have added a “permanent” apparel section in their stores for year-around shopping experience. Costco is always known for its very fluid warehouse layout with unmarked aisles. Having apparel in a fixed location probably highlights the success that Costco has had in selling it. In my experience, Costco always seems to find right quality at the lowest price. Finally, there’s been a resurgence of sales at J. C. Penny. They reported a 3.9% growth in sales in November/December of 2015. There is a possibility that J. C. Penny would continue their revival and take market share from Macy’s.
The Answer: Prioritize, Focus, and Experiment
The goal for Macy’s should be to become the best innovator in retail. That’s the only way to compete against the likes of Amazon, Wal*Mart, and Costco. They need to invest a lot of money experimenting on everything from store layouts, product selection, employee training, and workflow processes. To achieve this, they should focus on the customer experience as a driver for every innovation they try.
Macy’s could probably copy Amazon and try having lockers in their stores. Lockers could be used to deliver on-line shipments and thus relieve store associates from retrieving packages. Like Amazon, Macy’s can make store inventory decisions based on feedback they receive online. Amazon has a vast database filled with feedback, Macy’s probably does not. That’s why it’s critical for Macy’s to enhance their online shopping experience to win the omnichannel wars.
Expensive investments are required by Macy’s to achieve this goal. They may have to suspend their dividend or stop their share repurchase or do both to fund these investment. In the short-term (2-3 years), their stock will get battered and will languish, but they have a chance to win the long-term. But, if they stick with their current path without dramatic changes they may die a slow death.
In the end, the only thing that matters is the customer experience. If your brand can make an emotional connection with a customer, your company will win in the long-term. This is true for every company in the world and retailers such as Macy’s are no exception.
For Macy’s, the road ahead is tough, but the journey is worth it.
Disclaimer: I just love learning about companies. I am not an investment advisor and this blog post should not be considered investment advise.