Investors Fret as Macy’s Launches Growth Ventures

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Macy’s is one of Cincinnati’s hardest-hit stocks after a month of market volatility, with shares down a bruising 20% from the all-time high it hit in mid-July.

The tumble snaps an almost seven-year winning streak as the Cincinnati-based retailer deftly navigated the Great Recession and its lingering aftermath that dragged down so many competitors.

But 2015 has proved to be choppy for Macy’s as it explored opportunities to take its growth to new heights.

Early this year, Macy’s bought a beauty and spa retailer. Then in May it announced the launch of an off-price concept called Macy’s Backstage. Last month it announced a joint venture to expand e-commerce into China.

Despite all the new initiatives, Macy’s delivered back-to-back first and second quarterly profit results that disappointed Wall Street. Also, during a summer that made Macy’s sweat, an activist investor loudly suggested the retailer consider selling or spinning off its real estate assets.

“Growing sales is where it all starts — if you can’t increase the top line, ultimately you won’t grow profits,” said Terry Kelly, principal with Bartlett & Co.

Last week, Macy’s opened the first four off-price stores in New York City. The retailer says it will open another two this year, then ramp up the number of stores in 2016.

Macy’s Backstage is shaping up to be a command performance as analysts eagerly await results.

What appears to have shaken investors is its growth prospects, which Macy’s started 2015 planning to address head-on.

In February, executives talked about the beginning of a “third phase” for Macy’s as it disclosed annual results for the 2014 fiscal year that ended Jan. 31.

The first two phases were: first, in 2005 when Macy’s doubled in size after buying out its largest rival, May Department Stores and second, in 2008 when Macy’s refined its integration strategy to boost stores performance and profitability.

Until this year, Macy’s had outperformed by maximizing its profitability, if not its sales. In 2014, Macy’s netted a $1.5 billion profit on $28.1 billion in sales, compared with the $995 million profit in 2007 when it did $27 billion in sales.

Macy’s latest venture to grow its overall sales, Macy’s Backstage, moves the retailer into off-price retailing, a faster-growing category populated by the likes of TJ Maxx and Ross Stores. Analysts note Macy’s rival Nordstrom has found renewed growth with its off-price chain, Nordstrom Rack, which has become a $3.2 billion chain itself.

Analysts say Macy’s Backstage could help groom the next generation of Macy’s shoppers with an appealing mix of less expensive merchandise. But the trick will be to not unwittingly encourage existing Macy’s customers to trade down.

“It’s a no-brainer for them: off-price is the fastest growing segment of the apparel industry, they need to be in,” said Howard Davidowitz, chairman of New York retail consulting firm Davidowitz & Associates. “TJ Maxx is the most successful apparel retailer of the last decade bar none.”

Davidowitz said off-price concepts have been the growth engines of rivals Saks and Nordstrom.

While Macy’s is getting into the segment later than the rivals, Davidowitz noted Macy’s existing network of suppliers should make it easier for the company to negotiate special lines of apparel for Backstage.

Meanwhile, Macy’s is also pursuing expansion of the Bluemercury specialty beauty and spa chain it bought in February for $200 million. The retailer says it will open another 10 free-standing stores by the end of the year, which will expand the total store count to 76. Macy’s will also open four Bluemercury stores within Macy’s locations by the busy holiday season as well as cross-sell its merchandise on macys.com.

Even as Macy’s presses ahead with constructing off-price and beauty stores, the retailer disclosed in August it is also hired real estate advisers to “intensely study its real estate portfolio to determine where opportunities exist.”

The examination came a month after a new Macy’s investor, hedge fund manager Jeffrey Smith, loudly suggested the retailer split off its real estate holdings into a separate company and then rent its properties from the new business. Smith’s Starboard Value bought 2.9 million shares or 0.8% of Macy’s in the spring, government disclosures show.

The theory behind such a move is it would be a bonanza gain for Macy’s shareholders and the retailer would free up money that’s tied up in real estate. Macy’s officials have resisted the move, saying there are advantages to owning stores and that each store is different.

But last month, the company also announced a deal to redevelop its Brooklyn store and sell half of its floors for $270 million to an office developer.

Macy’s sagging quarterly results and stock performance ironically come as the U.S. economy appears to be picking up steam.

Growing jobs and lower gas prices mean more discretionary income for American shoppers, normally a strong sign for consumer stocks such as Macy’s.

Still, Andy Stout, managing director of investments at Simply Money in Symmes Township, noted a hefty chunk of the strong 3.7% increase in U.S. gross domestic product came from inventory building — businesses restocking their warehouses in anticipation of more consumer spending.

“People don’t believe gas prices are going to stay down yet. They’re not spending their gas dividend,” Stout said. “Prices are going to have to stay down for a few more months before people change their habits.”

http://www.usatoday.com/story/money/business/2015/09/06/investors-fret-macys-launches-growth-ventures/71816760/

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