Macy’s (M) Q2 2016 Results – Earnings Call Transcript
Karen M. Hoguet – Chief Financial Officer
Sales down 4% but better than 1Q comp
Sales in the second quarter were $5.866 billion, down 4% from last year. On a comp owned-plus-licensed basis, sales were down 2%. This compares to the 5.6% drop we experienced in the first quarter. On a two-year basis, the first quarter was down 2.9% per year and the second quarter down 1.7%, representing a 1.2-point improvement in this trend. Both Macy’s and Bloomingdale’s experienced improvement in the second quarter.
Four factors contributed to the trend change: weather, better international, sales generating strategies and promotional events
We would cite four key factors contributing to this trend change. One, weather has been hot this summer and has contributed to the strong apparel sales and perhaps more shopping in general as a way to avoid the heat.
Two, international credit card sales were down 12% in the second quarter. This compares to a 20% drop in the first quarter. While this still negatively impacted our comp sales by approximately 60 basis points in the second quarter, it had less of an impact than it has had in recent quarters. As a result, our sales trend in the major tourist stores improved for both Macy’s and Bloomingdale’s in the quarter. Three, many of our sales-generating strategies are beginning to kick in. The investment in staffing in our best stores, our fine jewelry strategy, the Last Act clearance strategy, and home store improvements, this is very encouraging. And four, a few strong promotional events and sharper pricing helped in the quarter as well, and we were able to structure these events to both drive sales and preserve our gross margin rate.
Apparel was strong
The families of business that were strongest in the quarter included all of apparel, men’s, women’s, and kids’, as well as fine jewelry, shoes, fragrances, textiles, and housewares. Handbags and fashion jewelry and watches continued to be weak.
Strong back to school season
We are encouraged by the start of the back-to-school season. We are seeing strength in all categories, but are most excited by the strong trend in denim.
We decided to be proactive and to close a larger number of stores this year. This will bring the shopping experience to a consistently higher level and concentrates Macy’s stores in locations with better potential. We believe we can benefit from right-sizing the company. This will force us to make necessary overhead reductions to preserve profitability and ongoing cash flow. And while it will shrink the company somewhat, these closings will positively impact our return on invested capital and help us to accelerate our growth.
Believe they can retain sales
This potential sales loss is lower than the projected volume of these 100 roughly stores due to our ability to retain some of the sales in other stores as well as on macys.com. With the stores we’ve closed in recent years, we have greatly improved our ability to retain sales both through new targeted marketing efforts and by trying to make sure that we add specific merchandise, categories, and vendors that is in stores that are being closed into stores that are nearby.
“shrink to grow”
One of the reasons we feel it is right to shrink to grow is the success we’re beginning to have in our top doors. Our work with our top 150 doors gives us confidence that we can accelerate our growth in these strategically critical locations. We want to focus our financial resources and our talent to make this happen, along with fueling our digital growth.
There’s no doubt that retail is changing
Retailing is changing, there’s no doubt about it. Our company is committed to being tomorrow’s leader in omni-channel retailing. We will strike the right balance between stores and digital. And the closing of 100 locations will get us to where we think we need to be, all while maintaining a significant physical presence in virtually every major market across America.
Seeing some increase in credit card delinquencies
No, remember, we had expected credit income to be below last year when we started the year, so this is not a surprising trend. We are seeing some increase in delinquencies, as we had said. But remember, part of that is because we’re also trying to grow the portfolio. So there’s nothing concerning happening in the portfolio today, and it is happening as we had anticipated.