By Suzanne Kapner at The Wall Street Journal
Macy’s Inc. set off fresh fears about the health of the U.S. retail sector, after the country’s largest department-store chain reported its worst quarterly sales since the recession.
The company’s poor results and downbeat comments Wednesday triggered a selloff across apparel makers, mall owners, luxury brands and rival chains. Macy’s shares had their biggest drop since 2008.
“We are not counting on the consumer to spend more,” Chief Executive Terry Lundgrensaid Wednesday. With saving rates high, wages growing and employment data steady, Macy’s executives were at a loss to explain why consumers weren’t spending in its stores. “We’re, frankly, scratching our heads,” said Chief Financial Officer Karen Hoguet.
America’s shift to online shopping and fast-fashion chains is squeezing Macy’s and its peers, which have responded by closing weaker locations and investing in e-commerce. But the moves haven’t been enough to counter weak demand.
“Clearly, our industry is in something of a rough patch,” Ms. Hoguet said. “We know we are not alone.”
Macy’s, whose shares tumbled 15% Wednesday, is the first major retailer to disclose results for the start of the year. Kohl’s Corp., Nordstrom Inc. and J.C. Penney Co. are expected to face similar challenges when they report this week.
Sales at Macy’s stores—excluding locations that were opened or closed over the past year—fell 5.6% in the April-ended quarter, the fifth straight decline and its worst quarterly performance since the second quarter of 2009.
Department stores were once the backbone of shopping centers, but now mall owners are finding a new type of anchor tenant to take their stead. Since 2011, General Growth Properties Inc. has filled 79 of 83 vacant department stores at its malls with new tenants that include Forever 21, H&M Hennes & Mauritz AB, Dick’s Sporting Goods Inc. and grocer Wegmans Food Markets Inc., according to its recent investor presentation.
Discount chains like T.J. Maxx and fast-fashion retailers such as H&M, which can offer jeans as cheap as $17 and polo shirts for $10, are grabbing foot traffic and hurting demand for the $50 jeans and $80 polo shirts that Macy’s sells.
“People are getting pickier,” said Ken Bernstein, chief executive of shopping center owner Acadia Realty Trust, in a recent interview. He said sales at his malls increased in the first quarter, but noted that shopping centers were increasingly housing services such as hair salons and fitness centers instead of stores where people buy goods.
Nondiscretionary spending on health, insurance, education and housing has taken an extra 4% out of personal-consumption expenditures in 2015 compared with 2000, according to Craig Johnson, president of consulting firm Customer Growth Partners. That has reduced the discretionary spending available for traditional retailers by $500 billion—more than the combined annual U.S. sales of Wal-Mart Stores Inc. and Costco Wholesale Corp., Mr. Johnson said.
Mr. Lundgren, Macy’s CEO, said he expects these weak consumer-spending trends to continue and the retailer is changing its strategy to improve its results for the remainder of 2016.
In the first quarter, the number of transactions at the retailer—a proxy for foot traffic—fell 7%, which Ms. Hoguet said was “far worse” than last year, when they declined slightly. Average unit retail, a measure for what consumers are willing to spend, increased by a little. But sales on international tourist credit cards declined 20% in the period, following a 21% drop in the year-ago period.
Fierce online competition to match prices and offer promotions will weigh on Macy’s margins through the year. “The competitive environment has become a lot more promotional,” Ms. Hoguet said. “I think part of this is a result of the Internet, where every promotion happens across the country immediately.”
Macy’s said Wednesday it would intensify cost-cutting efforts after having recently shut 41 stores. The company also said it would expand its Backstage discount concept, as a way to challenge off-price competitors. On Wednesday, Ms. Hoguet said the company could open Backstage shops within as many as 300 of its existing stores.
To attract more shoppers, Macy’s is turning to more exclusive merchandise, including a new clothing line developed by Sir Elton John and Lady Gaga, rolling out a new jewelry format and testing a “health and wellness concept.” It is also adding Bluemercury beauty shops to its stores.
Despite the initiatives, analysts are frustrated that Macy’s isn’t moving fast enough to reinvent itself and to sell parts of its real-estate holdings.
“The blunt truth is that Macy’s does not give consumers a reason to visit its stores,” Neil Saunders, managing director of retail research firm Conlumino, wrote in a note. Many locations “are poorly merchandised, hard to shop, lack any inspiration, and have fairly mediocre customer service.”
Apparel companies that sell through Macy’s and other department stores were punished Wednesday, with shares of Ralph Lauren Corp., PVH Corp., which owns Tommy Hilfiger and Calvin Klein, and VF Corp.—owner of brands like Nautica and Wrangler—losing 5% or more on the news. Ralph Lauren, which gets 12% of its sales from Macy’s, is slated to release its latest results Thursday.
Macy’s disappointing results aren’t necessarily a harbinger of weak performance across the retailer industry. In November, Macy’s jolted the market with a worse-than-expected quarterly sales decline, but Wal-Mart and Home Depot Inc. both reported sales increases for the period.
Macy’s shares closed at $31.38 in New York Wednesday, down 51% over the past 12 months. Shares of rivals Nordstrom, Kohl’s and Target Corp. fell more than 5% in the session. J.C. Penney, which earlier this week said it topped its own goal for a measure of profit in the latest quarter, slipped 2.5%.
Shares of Amazon.com Inc. rose slightly, reinforcing the view of Cowen & Co. analyst John Kernan that Amazon will unseat Macy’s as the largest apparel seller by next year.
For the quarter ended April 30, Macy’s reported a profit of $116 million, down 40% from $193 million a year earlier. Revenue fell 7.4% to $5.77 billion. Macy’s predicted a same-store sales decline of between 3% and 4% for the year, compared with a 2.5% fall last year. It also slashed its forecast adjusted per-share earnings for the year.
Under pressure from activist investor Starboard Value LP to spin off its real-estate holdings, Macy’s Wednesday said it is evaluating proposals from potential partners for joint ventures or similar arrangements involving Macy’s flagship locations and the company’s mall-based store portfolio. “These complex transactions are being thoroughly explored,” Macy’s said.