(Bloomberg) -- Macy’s Inc. slightly missed analysts’ estimates for its quarterly revenue and lowered its outlook for sales during the rest of the year, citing increased discounting by competitors and a more cautious consumer.
Sales in the quarter through Aug. 3 fell 3.8% to $4.9 billion, the department-store operator said Wednesday in a statement. Analysts surveyed by Bloomberg had been expecting revenue of $5.1 billion on average.
The company’s shares fell 13% at 9:42 a.m. in New York.
“In the second quarter, we began to see the customer become even more discerning,” Chief Executive Officer Tony Spring said in an interview. “We did not see any material change in our traffic. We did see a change in conversion, and that to us really means people were either distracted, or they were even more cautious than we had seen previously.”
Despite the weakness, Macy’s kept costs down and delivered adjusted earnings of 53 cents a share. That easily topped the average estimate from analysts, and the retailer maintained its annual guidance for that measure.
After the weaker-than-expected quarter, Macy’s reduced its annual sales forecast for the fiscal year about 2% to as much as $22.4 billion.
“It will be a more rocky remainder of the year,” Spring said.
Cost Cutting
To counter the slowdown, Macy’s has focused on cost cutting. That’s been paying off during the past two quarters. Macy’s also beat profit estimates in the previous quarter that ended on May 4.
“We are leaning into every available expense stream” that doesn’t erode customers’ shopping experience, Spring said. “We are trying to make sure that our cost of operations, our packaging, our delivery expense, our costs for paper and shopping bags” are decreasing, he added.
The sales results show that Spring’s turnaround plan for the iconic retailer is struggling to gain momentum. Since he took over in February, he has been closing Macy’s stores with falling revenue and investing in ones where sales have been more robust.
The CEO is also opening more locations of Bloomingdale’s and Bluemercury, the cosmetics chain, both of which are higher-end than mass-market Macy’s and have reported stronger sales.
Three-Year Plan
Spring has cautioned investors that it will take time for his changes to bear fruit. The quarterly profit beat and revenue miss on Wednesday, combined with a lowered annual outlook, show the difficulty of reporting consistent results while trying to roll out changes across the retailer’s three chains. “We’re only two quarters in to a three-year plan,” Spring told analysts on Wednesday’s earnings call.
At the 50 stores where Macy’s has been investing more by hiring staff and improving displays and marketing, revenue has been stronger. Spring says that gives him confidence in his strategy. For example, when Macy’s put more employees on the floor to sell handbags and shoes in those top-performing stores in recent months and improved the quality of the merchandise it sells, sales increased. So Spring is rolling out those changes to an additional 100 Macy’s stores the coming months, he said.
But competitors such as Target Corp. have been cutting prices to drive traffic, stiffening competition. Spring said Macy’s is lowering prices on some more expensive, big-ticket items such as home goods, but is holding steady on in-demand products to protect profitability.
“When the customer gets more discerning, he or she treats themselves,” Spring said in the interview. In women’s apparel, for example, “it isn’t about price,” he said. “It’s about newness. It’s about the right silhouette.” Still, the retailer’s off-price channels, such as Macy’s outlets, have continued to “perform well,” he added.
Buyout Talks
Investors are paying even more attention to the progress Spring is making, after he and the Macy’s board ended buyout talks with Arkhouse Management Co. and Brigade Capital Management in July. That’s allowed Macy’s executives to pivot their attention away from the deal talks with investors to focus on the retail business, but it’s also increased the pressure on them to deliver on a turnaround.
It’s a tall order.
Macy’s said in February, when it announced the plan, that it expects the changes to boost comparable sales by a low-single–digit percentage starting in 2025.
“Expecting positive comps,” Citi analyst Paul Lejuez wrote in a recent note, “may be too much to hope for.” Macy’s hasn’t consistently achieved that during the past decade. Still, closing stores is the right move and “should better position it for the future,” Lejuez said.
In the most recent quarter, comparable sales at Macy’s were down 4.5% on an owned basis and fell 1.1% at Bloomingdale’s, a sign that even high-end consumers are showing greater caution. At Bluemercury, they rose 2%. Sales of skincare and other beauty products have remained strong despite a slowdown in consumer spending elsewhere, buoying the results at the cosmetics chain.
(Updates with shares and additional CEO comments and context.)
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