Can Macy’s escape the Department Store Death Spiral?

The great department store die off is now in full-swing. One operator is disappearing completely; the Bon-Ton Stores Inc. will close and liquidate all 256 of its stores in 23 states.

That means seven department store brands; Bon-Ton, Bergner’s, Boston Store, Carson’s Elder-Beerman, Herberger’s, and Younkers, and 23,000 jobs will disappear completely, CNN reported. Bon-Ton was liquidated by a bankruptcy court because nobody was willing to buy the ailing chain.

Bon-Ton is far from alone, Sears (NASDAQ: SHLD) is closing around 200 stores and literally auctioning off some locations online. JC Penney (NYSE: JCP) which closed 140 stores last year, is shuttering around eight stores and a distribution center.

Macy’s has lost the Apparel Wars

This brings us to the biggest department store name of all Macy’s (NYSE: M) which has clearly lost its edge in apparel. Macy’s which had been the largest apparel retailer lost that spot to discount department store TJX (NYSE: TJX) in 2016, Statista reported. TJX operates stores under the TJ Maxx, Sierra Trading Post, Marshalls, HomeGoods, HomeSense and Winners brands.

Macy’s is now trying to defend off aggressive challenges from Amazon (NASDAQ: AMZN) and Walmart (NYSE: WMT) both of which want a bigger piece of apparel. It is easy to see why clothes are a high-markup item, that is easy to ship, that everybody needs and most people are willing to spend a lot of cash on.

Amazon is set to overtake Macy’s; or TJX, as America’s number one clothing retailer sometime this year, The Financial Times predicted. One reason for that is Amazon is growing, opening new fulfillment centers right and left while Macy’s is closing stores. Macy’s is currently in the progress of closing around 100 stores nationwide.

Surprise Macy’s Revenues are growing

Macy’s revenues actually grew for the first time in quite a while in 1st Quarter 2018, Stockrow data indicates.

The revenue growth rate was 1.77% which does little make up for losses, but it is far better than the -6.13% negative growth rate reported in 4th Quarter 2017. That means Macy’s delivered an effective revenue growth rate of 7.9%, which is very good.

The company will need several years of such growth rates to make up for its recent losses. Macy’s annual revenues fell from a high of $28.015 billion on 31 January 2016, to $24.837 billion on February 3, 2018. Macy’s has lost $3.178 billion in revenues over the past three years.

Is Macy’s Making Money?

The smart investors will say Macy’s revenues are growing again so what? They will ask the truly important question: “is Macy’s making money?”

The answer is yes, Macy’s reported an operating income of $1.213 billion, a gross profit of $3.308 billion, and a net income of $1.325 billion for 1st Quarter 2018. The company actually made money over a very difficult 2017 holiday season, when other retailers were collapsing.

Those numbers translated into an operating cash flow of $1.555 billion and a free cash flow of $1.544 billion for 1st Quarter 2018 – that was a very impressive result in today’s retail environment. More importantly, Macy’s had $1.455 billion in cash on February 3, 2018, and $19.381 billion in total assets.

Despite its problems, Macy’s is in a very strong position because of the cash it has. Macy’s is still making money, and its stock looked like something of a value investment at $31.24 share on 4 May 2018.

Why is Macy’s Making Money?

All this brings us to a very important question: why is Macy’s still making money when other department stores are dying like flies?

A few obvious reasons why Macy’s is still making money include:

  • Less competition. Other department stores; and clothing retailers such as Abercrombie & Fitch (NYSE: ANF), are closing stores like crazy. Abercrombie & Fitch has announced plans to close 60 stores this year. There are fewer places to shop at the mall, which means more foot traffic at Macy’s.

 

  • There is a lot of room for profit in apparel sells. Clothing, especially fashion, is a high markup item. That gives Macy’s plenty of room to engage in deep-discounting but still make money.

 

  • Macy’s is in a great position to reduce rent and lease expenses because it has more leverage over landlords. Mall owners will have no choice but to cut special deals with Macy’s because it might the only department store brand left.

 

  • Macy’s is getting more efficient by reducing its’ footprint, cutting staff, and utilizing new technology.

 

  • Americans have a little more disposable income. Wage stagnation and income inequality are still huge problems, but Americans are making a little more money for a variety of reasons. One of the things they spend that extra disposable income on is clothes.

 

  • People still like to shop. At the end of the day, there are still a lot of people that prefer going to a brick and mortar store and buying physical goods they can try on. Not everybody shops online and not everybody buys everything online.

The Future of Macy’s

The factors mentioned above show that Macy’s still has moneymaking potential but does it have a future? That depends upon the company’s management and its ability and willingness to adapt to changing times.

Some steps Macy’s can take to survive and become more profitable include:

  • Reduce inventory. This can reduce the need for staff and expensive retail space. Inventory can be reduced by limiting selections, eliminating questionable categories of merchandise like small appliances, and offering more online pickup orders.

 

  • Expand service. Offer more amenities like restaurants, coffee bars, nail salons, hair salons, cafes, makeup salons, stylists, and tailoring in store.

  • Concentrate on sales of high markup items. This includes shoes, apparel, fashion, and makeup.

 

  • Lease space to companies selling unrelated products in its stores. A good example of how this can be done is Nordstrom’s (NYSE: JWN) partnership with Tesla Motors (NYSE: TSLA). Nordstrom lets Tesla open showrooms in stores.

 

  • A smart idea might be for Macy’s to allow auto brands like Jaguar, Land Rover, Tesla, Lincoln, Lexus, Acura, or Cadillac to open showrooms in its stores. Another would be to allow furniture or electronics bands to open showrooms at Macy’s. For example the Apple Store in Macy’s.

 

  • Rent space in stores to service businesses. Examples might include hair salons, barbers, nail salons, travel agencies, insurance agents, tax preparers and realtors.

  • Rent space to restaurants or fast-food outlets in stores. Brands to work with include Starbucks, Shake Shack, Five Guys, Chipotle, Panera Bread, Qboda, and possibly Boston Market.

 

  • Considering team up with retailers that sell unrelated products. Allow Barnes & Noble to put a bookstore in Macy’s, Restoration Hardware to sell tools, or Trader Joe’s to sell groceries at Macy’s.

 

  • Convert portions of Macy’s stores to non-retail uses such as office space, live-work space, storage units, apartments, hotels, data centers, or condominiums. Macy’s is already experimenting with this in some cities.

  • Team-up with online retailers like Amazon. Offer tailoring, alterations, returns, and other services for clothes purchased on Amazon at Macy’s.

 

  • Turn Macy’s stores into local or regional fulfillment centers for online delivery items. Drivers can pick up orders pulled from the store floor and take them to customers.

 

  • Become more like TJX by doing more deep discounting, and offering gimmicks like flash sales. Set up bargain basement type outlets at Macy’s stores.

The truth is that there is a lot Macy’s can do to make a lot more money. Investors need to watch closely to see if Macy’s management is willing to take those steps. If it is, then Macy’s is truly a value investment.