Macy's: What To Expect From The Incoming CEO

| About: Macy's Inc. (M)

Summary

Much attention was paid to the leadership change at Starbucks. On the contrary, the passing of baton at Macy's was muted.

I researched into incoming CEO Gennette's career history.

Based on what we know about his past, what can we expect when Gennette takes over as CEO?

Much attention has been paid to the announcement of Starbucks (NASDAQ:SBUX) CEO Schultz stepping down and the appointment of Kevin Johnson as the next CEO. Just looking at Seeking Alpha alone, a scan at the ticker symbol page of Starbucks shows no less than six articles focusing on that topic. The outpouring of both skepticism and support is understandable. The articles also sought to illuminate the background of the CEO, with some attempting to envision how he would lead the company forward. On the contrary, the passing of baton at Macy's (NYSE:M), expected to happen in the first quarter of 2017, was a low-key event. On Seeking Alpha, only one contributor has written specifically on the pending handover, though the author just made a cursory remark on the incoming CEO Jeff Gennette. The contrasting share price movements post-announcements were also telling. While Starbucks plunged more than 10% pre-trading after the succession plan was revealed, in the case of Macy's, its share price only declined 1.1%. Starbucks eventually recovered much of its intra-day losses to close down just 3%. At Macy's, the share price even gained 3.5% during active trading hours, signifying the market receptiveness towards the end of Terry Lundgren's 14-year tenure as CEO of Macy's.

The share price of Macy's is at five-year lows and less than half the peak price achieved just 18 months ago. It has been a heart-wrenching journey for investors of Macy's, with the share price seemingly on a solid recovery path during much of the second-half of 2016, only to see it give up all of those gains just a few days into the new year. Recent price weakness due to the disappointing guidance by the company as well as other major retailers such as J.C. Penney (NYSE:JCP), Dillard's (NYSE:DDS) and Nordstrom (NYSE:JWN) on holiday sales is largely water under the bridge. Next important event for investors to watch out for is the actual Q4 2016 results and 2017 guidance. Investors might be looking forward to Jeff sharing his plans as the new CEO or expecting analysts on the call to dig it out of him during the conference call for the fourth-quarter earnings release. Unfortunately, either scenario is unlikely to happen as for the past earnings conference calls, only the CFO, Karen Hoguet, had turned up. Hence, to get early insights into what Gennette as the CEO would entail, some research into Gennette's career history and past decisions would hopefully shed some light on his ability to revive Macy's and bring back its glorious days as an admired brand among retailers.

Brief Career History of Jeff Gennette

Jeff Gennette was named president of Macy's, Inc. in March 2014 after serving as the chief merchandising officer of the retailer since February 2009. At the time of appointment, analysts had already interpreted the promotion as part of the succession planning whereby Gennette was being groomed to take over as CEO at some point in the future. From February 2008 to February 2009, Gennette served as chairman and CEO of Macy's West in San Francisco. Thirty-three years ago, in 1983, he started his retail career as an executive trainee at Macy's West. Subsequently, he moved up the ranks, holding positions of increasing responsibilities, including vice president and division merchandise manager for the men's collection and senior vice president and general merchandise manager for men's and children's. In 2004, Gennette was appointed executive vice president and director of stores at Macy's Central in Atlanta. From February 2006 to February 2008, Gennette was chairman and chief executive officer of Seattle-based Macy's Northwest. During his career, Gennette also served as a store manager for FAO Schwarz and director of stores for Broadway Stores, Inc. Gennette, a native of San Diego, is a graduate of Stanford University. A Wall Street Journal reporter described Gennette as an English major who "developed a love of words that has translated into a hard-core Scrabble habit." Besides his personal affiliation with Macy's, Gennette has additional insights about the company as he is the husband of a former Macy's store-level employee.

Jeff Gennette is an extraordinary leader who has distinguished himself as a skilled merchant and retail operator. He has worked closely with me over the past two years as president of Macy's, Inc. in a first step in this succession process, and we are closely aligned on creating a compelling and sustainable path forward.

- Terry J. Lundgren, chairman and chief executive officer of Macy's, Inc.

What To Expect When Gennette Takes Over?

From what Gennette said in an interview last year, it seems he does not intend to implement major changes. According to a New York Times article, Gennette said: "We're a promotional department store, and we will continue to be a promotional department store." He had also reportedly said, "he expected to continue several of the initiatives begun under his predecessor." Apart from that, Gennette said to Reuters that he was "going to reduce (customer) pain points, going to focus on our stores at a greater level than we have over the past year." There would also be renewed attention on the beauty business as "we've got some pretty fierce competitors out there." He then reiterated his commitment to Macy's serving as a one-stop shop, an existing strategic marketing proposition, where those getting married could look for wedding rings in the fine jewelry departments, and eventually return for merchandise for their first house and kid. Essentially, there is no indication yet of Gennette planning to revolutionize what Macy's has been doing, or at least until he becomes CEO and emerges from the long shadow of soon-to-be former CEO Lundgren. His comments thus far have reinforced the view that any moves made by him as the CEO would most likely be evolutionary, given that he is a 33-year insider compared with someone who is coming in with a fresh pair of hands and who might be more adventurous but risk enacting some ideas that are not appropriate for the company due to the lack of understanding of the company's strengths and weaknesses.

Nevertheless, even with nothing earth-shaking expected at Macy's under Gennette's leadership, if he could execute existing strategic plans successfully, it would show up in the results in the near future. For instance, spurred by pressure from activist investor Jeff Smith, the CEO of Starboard Capital, who exhorted Macy's to evaluate its store portfolio and consider spinning off properties, the company hired Douglas Sesler as executive vice president for real estate. Sesler is tasked with creating potential joint ventures or other partnerships for the company's flagship locations and mall-based properties. Last year, CEO Lundgren acknowledged that many of the real estate transactions can be rather complicated and certain identified locations could see completion stretching beyond 2016. Given the time frame, it would mean that certain transactions would be taking place after Gennette formally takes on the role of CEO. The successful conclusion would then unlock value for Macy's and consequently placate activist investors.

Another unfinished strategic development to be continued under Gennette would be the extension of its licensing model and the leasing of space in its 800-plus department stores to third-party specialty retailers. The company has been emboldened on this strategy as it has tasted early success through bringing on board The Finish Line (NASDAQ:FINL), which has augmented Macy's athletic footwear offerings.

Advantages from Gennette's Appointment as CEO

It remains to be seen what initiatives Macy's has implemented were the brainchild of Justin MacFarlane, who joined Macy's in February 2016 in the new position of chief strategy, analytics and innovation officer. Interestingly, since his appointment, he has been reporting directly to Gennette. MacFarlane was previously with Ann, Inc. as senior vice president for corporate strategy with responsibility for strategic planning, consumer insights, and research, and execution of enterprise strategic initiatives. Before ANN, he served in a number of senior-level roles in leading consulting firms, including leadership roles in the global retail practices of AlixPartners and Kurt Salmon Associates. MacFarlane also holds an MBA from Duke University. As Lundgren has a larger-than-life presence in the company, talented personnel might find it tough to bring forth their ideas when he is CEO. I suspect that when Gennette assumes the role of CEO, MacFarlane might have a greater leeway in actually performing his role and demonstrating his capabilities, with Lundgren in the background.

The handover also could help Macy's get over the boycott of the brand as a result of the famous war of tweets between the incumbent CEO, Lundgren, and president-elect Donald Trump. Incoming CEO Jeff Gennette has not, at least publicly, been known to have any altercation with Trump.

Conclusion

Hiring an outsider with an aim to end the malaise facing retailers is not something that would absolutely come to fruition as those following J.C. Penney would attest to. Ron Johnson, who was appointed as CEO of J.C. Penney in 2011, was booted out of the company by its board after just 17 months into the job. Before joining J.C. Penney, Johnson was credited with "the development of the Apple (NASDAQ:AAPL) Store's future-forward retail aesthetic and Target's (NYSE:TGT) trendy-not-spendy design sensibilities."

Gennette has proven his abilities rising up the ranks in Macy's. There are still several initiatives started by Lundgren which have not yet been completed. Having Gennette as a 33-year insider would ensure continuity and he would most likely avoid landing Macy's into some radical retail experiment that the company cannot recover from if the experiment fails. As shareholders of Macy's, we should count ourselves fortunate that Gennette is still with the company. In 2013, the Wall Street Journal reported that Gennette rejected an offer to be CEO at Shopko, a chain of retail stores based in Ashwaubenon, Wisconsin.

Let's give the incoming CEO a chance to right the ship.

Disclosure: I am/we are long M.

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.

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