Macy's By the Numbers: Pre-Pandemic vs. Post-Pandemic
To understand Macy's current situation, compare their Q2 2020 results with Q2 2019. Overall, the company shows a sharp decline in financial performance.
- Net Sales: $3.559 billion in Q2 2020, down from $6.576 billion in Q1 2020. This fall in sales volume largely coincides with the first wave of the pandemic sweeping through the United States.
- Digital sales: The company achieved a significant win by growing digital sales by more than 50% compared to Q1 2019. Increased digital sales represent the company's major success in Q2. In 2019, digital sales accounted for approximately 25% of the company's total revenue (or $6 billion).
- Net Income: Negative $431 million in Q2 2020, down from positive $400 million in Q1 2020. The fall in net income and net sales are two key reasons why the company's stock price has collapsed. In contrast, take a look at Target. In Q2 2020, Target achieved $1.69 billion in net income! Target's Q2 2020 revenue reached $22 billion, the highest quarterly revenue in more than a year. The fact that other retailers have achieved success in 2020 will cause Macy's investors, customers, and employees concern.
- Stock Price: $16.16 on August 15, 2019 (one day after Q1 2019 results were released). The share price fell to $7.61 by September 3, 2020 (one day after Q2 2020 results were released). In contrast, compare Macy's to the S&P 500 stock index, which measures the performance of large US stocks. On August 15, 2019, the S&P 500 index closed at 2,847 and rose to 3,455.06. That tells us that Macy's fall is probably not related to stock market-wide issues.
By the numbers, Macy's has had a difficult 2020 by any measure. To recover profitability, Macy's management team is planning several new strategies.
How Is Macy's Planning to Recover From Here?
Unlike some other large retail companies like Pier 1 Imports, J. Crew, and Nieman Marcus, Macy's is still in business. Furthermore, the company has a war chest of more than $1.3 billion in cash on its balance sheet as of August 2020. That means the company has some options in charting its course forward. Macy's management is considering a few options to improve its performance in the future.
Closing Stores: Cutting Costs to Regain Profitability
By closing over one hundred stores, Macy's will reduce its expenses substantially. Some measures taken will include laying off staff, reducing inventory, and cutting other expenses, which will result in lowered company costs. Long time loyal customers are probably wondering if the company will keep its flagship store in New York City open. With more than one million square feet of retail space, the store is one of the largest retail locations in the COVID-hit city. Some reduction in square footage is certainly likely.
In Q2 2020, the company has already announced closing for seven locations. In contrast, the company has only announced the opening of three stores in 2020. At this stage, it is unclear how quickly Macy's will start closing stores. Pandemic-related restrictions in various states may make it challenging to implement store closures right now. Therefore, profitability gains due to cost-cutting are unlikely to unfold quickly.
Opening Smaller Stores: Macy's Moves Away From Large Malls
While closing stores will reduce expenses, it is not enough to rescue the company, which is why Macy’s has started to explore a different type of store. According to Macy's CEO Jeff Gennette, the company will open more of its stores away from established malls. Also, plans are on the horizon to increase its lower-priced division, Macy's Backstage. While there are only six existing locations, construction and renovation are expected within the next three to six months but may be slow due to the pandemic.
Digital Sales: Tens of Millions of Potential Customers Visit Macy's Online Monthly
Macy's digital sales are an area of opportunity for the company. However, it faces significant competition from other large retailers like Wal-Mart and Amazon. In 2019, ecommerce accounted for less than 10% of the company's $341 billion in revenue. Fortunately, Macy's has a very popular website with tens of millions of monthly visitors. If the company can increase conversions by even a small amount, it may be able to grow its digital sales dramatically. Consequently, we are likely to see Macy's increase its investment in digital marketing and ecommerce to grow this high margin business.
What the Experts Say About the Future of Macy's Business
Investment analysts are overwhelmingly against Macy's at this time. As of September 10, 2020, MarketWatch reports that six analysts recommend selling the stock. That's an increase from the five sell ratings on the stock we saw just three months ago. Further, the average target stock price for analysts covering the stock is $6.58, less than the company's current stock price ($7.40 as of September 10). In contrast, nineteen analysts have a buy recommendation for Walmart stock, according to MarketWatch. These estimates tell us that there is a high degree of investor skepticism regarding Macy's short-term future.