Macy's - Keeping Pace With Consumer Behavior

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 |  About: Macy's Inc. (M)
by: Alpha Strategist

The last quarter of 2013 was particularly challenging for Macy's Inc. (NYSE:M) and weather forced the company to close 244 of its Macy's and Bloomingdale's stores during the most recently-ended quarter. On average, each store yielded about $122,000 per day this quarter. Assuming that none of the stores remained shut for more than one day, the total estimated loss figure attributed to extreme weather was $30 million.

Recent Performance

Much of the blame for the lower level of sales was due to climatic conditions such as snowstorms that hindered foot traffic in retail stores. Anticipating severe weather conditions, the company was already expecting scanty sales in January; however, the actual sales figure was much lower than had been forecasted. Analysts believe that sales fell by as much as 6%, including the departments licensed to third parties, in the month of January. With sales falling short of expectations, the company found itself wrestling with increasing inventory levels that rose by 4.7% over the quarter.

Net revenues of the company were $9.2 billion slumping by 1.6% compared to the same quarter last year. Analysts were expecting the company to yield net revenues of $9.28 billion this quarter. Same-store sales of the company increased by 1.4% compared to analysts' estimates of 2.5%. The holiday season, up until December, showed a strong performance; however, the same-store sales of the company showing an increase of 4.3%. Note that these figures are inclusive of departments licensed to third parties.

Besides the extreme weather, another plausible reason for the faltering revenues of the company is the plunging employment rates during the months of December and January. The employment rate for January has fallen short of the consensus. Again, the blame goes to changing climate since most businesses and companies have underperformed during this period. The underperformance led to much less hiring than had been anticipated.

Surprisingly, the bottom line beat analysts' estimates in spite of the sluggish topline figure. The net profit of the company increased by 11% YoY to $811 million or $2.16 per share; however, excluding the costs related to store shut downs over the recent quarter the per share earnings figure rose to $2.31. Analysts were expecting $2.17 per share for the recently-ended quarter. The positive impact in profits was basically derived through cost efficiencies that Macy's achieved as a function of reorganization efforts on the part of the company. The overhaul operations are targeted to cut down redundant costs and operations and instigate online sales channel.

Last month the company announced that it would reduce its workforce by 2,500 to save at least $100 million per annum. The plan is in accordance with Macy's plan to close five of its underperforming stores. The actual number of laid-off employees amounted to 1,800 while the remaining employees were transferred to other departments. The cost cutting initiatives were undertaken with the expectation of sustaining profitability in the future.

Online Shopping Channel

Furthermore, the company is gradually developing its online sales department because it realizes the change in consumer spending behavior. Where brick and mortar stores are important to deliver an in-store shopping experience online shopping is becoming increasingly popular among consumers particularly during bad weather conditions. Technology is modifying the shopping experiences for retailers and shoppers alike. "Shopper tracker beacons" continuously track and communicate with potential shoppers nearby and send tailored messages based on their specific preferences. A recent survey indicated that 90% of the US population is willing to shop online (but not give up in-store shopping) from a specific store given that the store promises immediate product deliveries and/or availabilities. Even though digital shopping is gaining popularity consumers are not inclined to completely give up in-store shopping experience.

Macy's has had a hard time in driving in-store traffic this season. In order to boost its sales through other channels, the company has announced that it is instituting online shopping mechanisms this spring. Shoppers will have the opportunity to sift through their article of choice in the comfort of their homes, pay their bills online, avoid long queues at the cashiers, and pick up their purchased products in-store. This is just a start to drive online sales. As time goes on, it can be reasonably assumed that the department will develop and get better at meeting consumer requirements.

Concluding Remarks

Going forward, the company expects an improving sales performance during the rest of the year. However, Macy's CEO left a cautionary note regarding the seasonal changes that hit the topline of the company quite hard. As of now, the company projected a growth rate of 2.5% to 3% in its same-store sales as opposed to its prior 2.5% to 4% growth projection. Furthermore, per share earnings are forecasted to fall in the range of $4.40 to $4.50 and that coincides with analysts' expectations of $4.50 per share for 2014.

Considering that the company is responding to the changing consumer behavior and is instituting measures to counter emerging seasonality in sales, I hold the company in a positive light. Future sales of the company are bound to receive a boost in the upcoming years as the company's digital department develops and attracts online traffic.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.