By Suzanne Kapner
Macy's Inc. on Wednesday cut its forecast for sales growth this
year to zero after posting declines in quarterly revenue and
earnings, intensifying pressure on the retailer to find new ways to
grow beyond its core department-store business.
Macy's reported a 2.6% drop in sales to $6.1 billion in the
three months to Aug. 1. Sales at existing stores fell 2.1%. When
licensed departments are included, sales declined 1.5%.
"Our performance in the first half of the year was not as strong
as we had hoped," Chief Financial Officer Karen Hoguet said on a
conference call.
Shares of the retailer declined 5.6% in recent trading to
$63.74. For the year, the shares are down 1.6%.
The results extend a rough patch for a chain that dominates the
department-store landscape but is having trouble posting solid
growth as shopper habits change. The retailer also is now
contending with activist investor Starboard Value LP, which has
accumulated a stake in the retailer and is pushing Macy's to spin
off its real-estate holdings.
To that end, the company on Wednesday also said it agreed to
sell property in Brooklyn to real-estate developer Tishman Speyer
for $175 million. Macy's will continue to own five floors of the
store, or about 310,000 square feet. Tishman will own the remaining
three floors and a parking garage, which it will convert to office
space.
"Real-estate values clearly are nearing all-time highs, and so
over the past few months, we have been intensely studying the
subject again," Ms. Hoguet said. "It is too early to tell what the
results of this review will be."
As part of steps to diversify its business away from its U.S.
department-store operations, Macy's on Wednesday said it had set up
a joint venture with Hong Kong-based Fung Retailing Ltd. to begin
selling merchandise on Alibaba Group Holding Ltd.'s Tmall Global
platform later this year.
It is also pushing ahead with initiatives including an outlet
business, and expanding Bluemercury Inc., a chain of high-end
beauty stores Macy's acquired earlier this year. Macy's plans to
open six outlet stores called Macy's Backstage this fall. On
Wednesday, it said it plans to open 10 Bluemercury stores before
the end of the year, bringing the total to 76.
But its core U.S. market is suffering, leading Macy's to cut its
full-year forecast for sales excluding newly opened or closed
stores. It now expects no growth compared with a previous forecast
of 2% growth. Total sales are now forecast to fall 1%, compared
with an earlier estimate of 1% growth.
The retailer backed its earnings outlook of $4.70 to $4.80 a
share, helped by a $250 million gain from the Brooklyn real estate
sale. Profit for the quarter fell 25% to $217 million from a year
earlier.
The company said customers are spending their money at
restaurants and on health care, recreational activities and
electronics, rather than the traditional items that Macy's sells
such as apparel and home goods.
The company has also been hurt by a fall in tourist traffic due
to the strong dollar, the removal of a major promotional event and
the delay of markdowns to clear out inventory that had been held up
in West Coast ports. Weakness in fashion jewelry and watches--two
categories that had previously been growing strongly--weighed on
results.
The average transaction size fell 1.3%, while the number of
transactions also declined slightly. Gross margin narrowed to 40.9%
from 41.4% a year earlier, because of delayed receipt of goods from
the port slowdown and additional markdowns taken to spur sales. Ms.
Hoguet said the gross margin rate was lower than the company had
anticipated.
Inventory at the quarter's end was up 3.8%, mainly because
Macy's brought in goods early to get ready for the back-to-school
season, which Ms. Hoguet said had gotten off to a good start.
On the real-estate side, Ms. Hoguet said high property prices as
well as deals done by rival Hudson's Bay Co. earlier this year
persuaded Macy's to take another look at how it might unlock value
from its real estate.
As part of the Brooklyn deal, Tishman will contribute an
additional $100 million to the property, which Macy's will use to
renovate the five floors it continues to own and operate.
As for its joint venture in China, Ms. Hoguet said the
partnership will only include e-commerce sales for now. But she
didn't rule out the possibility of Macy's opening stores in the
country at some point. Together with Fung, Macy's expects to invest
$25 million in the venture over the next few months. It expects to
have e-commerce sales of $50 million by 2016.
Chelsey Dulaney contributed to this article.
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com
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