Business Overview and History

Macy's, Inc., a renowned American retailer with a legacy spanning over 150 years, is in the midst of a transformative journey as it navigates the evolving retail landscape. The company, which operates the iconic Macy's, Bloomingdale's, and Bluemercury brands, has embarked on an ambitious strategic plan dubbed "A Bold New Chapter" aimed at strengthening its core business, expanding its luxury presence, and streamlining operations.

Macy's, Inc. traces its roots back to 1858, when Rowland Hussey Macy opened a small dry goods store in New York City. Over the decades, the company grew into a retail powerhouse, pioneering the department store concept and becoming synonymous with American shopping culture. The iconic Macy's Thanksgiving Day Parade, first held in 1924, is a testament to the brand's enduring legacy and ability to capture the public's imagination.

In 1902, Macy's relocated to its iconic Herald Square location, which remains the company's flagship store today. The company's expansion accelerated in 1961 when Macy's merged with Bullock's, a California-based department store chain, to become Macy's West, marking the beginning of its national footprint. Throughout the 1990s, Macy's continued its growth by acquiring several regional department store chains, including Federated Department Stores and The May Department Stores Company.

In 2005, Macy's entered into a long-term marketing and servicing alliance with Citibank for its credit card program, allowing the company to focus on its core retail operations while leveraging Citibank's expertise in credit card management. Despite facing challenges in the early 2000s due to declining sales and profitability, Macy's underwent a major restructuring, closing underperforming stores and investing heavily in its digital and omni-channel capabilities.

In 2013, the company announced the closure of its Bloomingdale's and Macy's stores in certain locations while expanding its off-mall and small-format store concepts to better serve customers. Today, Macy's, Inc. operates approximately 750 stores across the United States, with a strong omni-channel presence through its digital platforms. The company's diverse product offerings span apparel, accessories, cosmetics, home furnishings, and more, catering to a wide range of consumers.

Financial Performance and Liquidity

Macy's, Inc. has weathered significant industry headwinds in recent years, including the rise of e-commerce and changing consumer preferences. In the fiscal year ended January 31, 2024, the company reported annual revenue of $23.87 billion, with a net income of $105 million. Operating cash flow for the same period was $1.30 billion, and free cash flow amounted to $312 million.

For the most recent quarter (Q2 2024), Macy's reported revenue of $5.10 billion, a 3.8% decrease compared to the same quarter last year. However, net income increased significantly from $22 million to $150 million. Operating cash flow decreased from $271 million to $137 million, and free cash flow declined from $531 million to -$195 million. The decrease in revenue was attributed to ongoing macroeconomic conditions, including inflationary pressures and an increasingly complex news cycle. Despite these challenges, the company reported strong gross margin expansion and better-than-expected SG&A expense control.

Macy's, Inc. maintains a healthy balance sheet, with a net debt position of $1.96 billion as of January 31, 2024. The company's current ratio, a measure of liquidity, stood at 1.20, indicating a strong ability to meet short-term obligations. The debt-to-equity ratio was 0.66, based on total debt of $5.96 billion and common stock equity of $4.08 billion. As of January 31, 2024, Macy's had $862 million in cash and cash equivalents, along with a $3.0 billion asset-based credit facility, of which $2.86 billion was available for borrowing after accounting for outstanding standby letters of credit.

The company's three main retail segments – Macy's, Bloomingdale's, and Bluemercury – have shown varying performance. In the second quarter of 2024, Macy's comparable sales declined 4.5% on an owned basis and 3.6% on an owned-plus-licensed-plus-marketplace basis. Bloomingdale's comparable sales declined 1.1% on an owned basis and 1.4% on an owned-plus-licensed-plus-marketplace basis. Bluemercury, however, saw a 2.0% increase in comparable sales on an owned basis.

Macy's, Inc. also generates revenue from its credit card program and Macy's Media Network. Credit card revenues decreased by $40 million or 14.2% in the first half of 2024 compared to the first half of 2023, primarily due to higher net credit losses. On the other hand, Macy's Media Network revenue grew by $12 million or 20.3% in the same period, driven by increased vendor engagement and higher advertiser and campaign counts.

Strategic Transformation: A Bold New Chapter

In 2023, Macy's, Inc. unveiled its "A Bold New Chapter" strategy, a comprehensive plan aimed at revitalizing the company's core Macy's brand, accelerating growth in its luxury offerings, and simplifying its end-to-end operations.

A key component of the strategy is the "First 50" initiative, which involves the transformation of 50 Macy's locations into showcase stores. These stores serve as a testbed for new merchandising, staffing, and customer experience initiatives, with the goal of identifying successful approaches that can be replicated across the broader Macy's fleet.

The early results from the First 50 stores have been encouraging, with these locations delivering two consecutive quarters of positive comparable sales growth and outperforming the rest of the Macy's nameplate by a significant margin. In response to this success, the company has announced plans to expand staffing enhancements in handbags and shoes to an additional 100 Macy's stores in the coming months.

Alongside the First 50 initiative, Macy's, Inc. is actively working to close and monetize its underperforming "non-go-forward" locations, a move that is expected to unlock value and sharpen the company's focus on its most promising assets. The company has increased its target for store closures in fiscal 2024 from approximately 50 to 55, reflecting the strong demand from landlords and developers for these properties.

In the luxury segment, Macy's, Inc. is continuing to invest in the growth of its Bloomingdale's and Bluemercury brands. Bloomingdale's recently launched an immersive "Wicked Good Holiday" campaign in partnership with the upcoming Universal Pictures film, showcasing the brand's ability to create engaging, experiential shopping events. Bluemercury, meanwhile, is celebrating its 25th anniversary this year, having achieved 14 consecutive quarters of comparable sales growth.

Simplifying and Modernizing Operations

The third pillar of Macy's, Inc.'s Bold New Chapter strategy is a focus on simplifying and modernizing its end-to-end operations. The company is actively working to reduce organizational complexity, generate cost savings, and reinvest those funds into growth initiatives.

Notable achievements in this area include improvements to the company's fulfillment network productivity and the simplification of its technology ecosystem. These investments have enhanced the customer experience through faster online deliveries and improved product in-stocks, while also contributing to stronger bottom-line performance and cash flow generation.

Outlook and Challenges

For the fiscal year 2024, Macy's, Inc. has updated its guidance, expecting net sales to be in the range of $22.1 billion to $22.4 billion. The company forecasts comparable sales for Macy's, Inc. (including non-go-forward locations and digital) to decline between 2% and 0.5%. For the Macy's nameplate go-forward locations and digital channels, comparable sales are expected to decline between 1.5% and flat. The company's luxury nameplates, Bloomingdale's and Bluemercury, are forecasted to collectively deliver a comparable sales increase of 0.5% to 2%.

Macy's, Inc. has also guided for an adjusted EBITDA margin of 8.6% to 9% of total revenue, reflecting the company's commitment to enhancing gross margins and exercising disciplined expense management. The gross margin as a percent of net sales is expected to be between 39% and 39.2%, while SG&A as a percent of total revenue is projected to be between 36.3% and 36.6%.

For the third quarter of 2024, Macy's expects net sales of $4.7 billion to $4.82 billion, with a gross margin rate of approximately 40.3% to 40.5%. The company anticipates adjusted diluted EPS to range from a loss of $0.04 to earnings of $0.01, including a roughly $30 million asset sale gain.

While the company has made significant progress on its Bold New Chapter strategy, it continues to navigate a challenging macroeconomic environment, including ongoing inflationary pressures and a complex news cycle that has impacted consumer spending patterns. The company remains focused on adapting its product assortment, marketing, and promotional strategies to address these headwinds.

Additionally, Macy's, Inc. faces long-term structural challenges common to the department store industry, such as the continued shift of consumer spending toward e-commerce and the rise of specialized, fast-fashion, and off-price competitors. The company's ability to successfully execute its transformation plan and adapt to evolving consumer preferences will be crucial in determining its future success.

Conclusion

Macy's, Inc. stands as a storied American retailer navigating a pivotal moment in its history. The company's "A Bold New Chapter" strategy represents a comprehensive effort to strengthen its core Macy's brand, accelerate growth in its luxury nameplates, and streamline its operations, all while contending with a challenging macroeconomic landscape.

The early results from the First 50 Macy's store initiative, the continued momentum at Bloomingdale's and Bluemercury, and the company's focus on improving efficiency and cash flow generation are all positive signs. However, Macy's, Inc. must remain nimble and innovative to overcome the structural headwinds facing the department store industry.

As Macy's, Inc. continues to execute its transformation plan, investors will closely monitor the company's ability to adapt to changing consumer preferences, drive sustainable revenue growth, and enhance profitability. The success of this iconic retailer's "Bold New Chapter" will undoubtedly be a key determinant of its long-term resilience and relevance in the evolving retail landscape.