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Macy’s, Inc. (M): What Lies Behind This Specialty Retailer’s Success?

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Macy’s, Inc. (NYSE:M) could serve as a case study for all of the ‘dos’ any retailer should follow. The company which runs the namesake Macy’s and Bloomingdale department-store chains has come out with a solid performance in the first quarter, beating all expectations for earnings. The company posted adjusted earnings of $0.55 per share on revenue of $6.39 billion. Analysts were expecting $0.51 per share on the same revenue.

Macy's, Inc. (NYSE:M)

More significant is the fact that despite bad weather that affected the overall retail environment and weakness in consumer spending, the company still posted same-store sales growth of 3.8%. If we exclude the effect of the company’s licensing agreements with Finish Line, etc., then the same-store growth would look even more impressive at 4.4%.

Macy’s, Inc. (NYSE:M) is witnessing solid demand for handbags, watches, menswear, and luggage. But its success is much more deep-rooted. Let us find out.

Connecting with customers

The key to Macy’s, Inc. (NYSE:M) success lies in its ability to understand exactly what the customer wants and satisfy them. In the competitive retail environment the company has been able to carve a niche for itself largely on account of its exclusive merchandise customized to suit local tastes. Almost half of the company’s sales come from exclusive and limited-distribution goods.

Through its MAGIC Selling Program, Macy’s, Inc. (NYSE:M) knows exactly what buyers prefer. As part of this initiative, the company trains its employees to be friendlier by following a few simple steps. These include striking a connection with customers, asking questions and listening, providing them with options and advice, inspiring them to buy, and celebrating the purchase. (I wish J.C. Penney Company, Inc. (NYSE:JCP) had taken the cue from Macy’s and had started listening to its customers earlier. It might have just avoided its current debacle.)

Macy’s, Inc. (NYSE:M) is a true omni-channel retailer. It has created a seamless shopping experience for its customers through its stores, websites, and mobile apps. More than half the customers look up the products online before visiting the store. And research has proven that among the people who search for information about a product online, more than 60% of purchase it from the nearby store rather than purchasing it online. So buyers do not like to be limited by rigid channels. Macy’s understands this.

Macy’s, Inc. (NYSE:M) is also making a big push for the millennial market, which targets the age group of 16-30. By the end of 2013, it expects to launch 13 millennial brands and expand the existing 11. This will augment same-store growth.

Clever merchandising strategy

Through its “My Macy’s” localization strategy, the company ensures that each store is stocked according to the tastes and preferences of individual neighborhoods. This is a reversal of traditional department-store retailing where all stores stock all product lines.

And in case buyers demand something that is not available in the stores, the products are easily procured from other stores serving as fulfillment centers and delivered to the buyer’s doorstep. By the end of this year Macy’s, Inc. (NYSE:M) would have 500 stores that would fulfill orders from other stores as well as the company’s online and mobile orders. This would ensure optimum store inventory and faster turnover.

Already with some 292 fulfillment stores (as of February 2, 2013) Macy’s has achieved much superior inventory control than its peers. After the retailers replenished their stock in the first quarter, Nordstrom, Inc. (NYSE:JWN) had 8.2% higher inventory year over year, and Kohl’s Corporation (NYSE:KSS) had 14.7% higher inventory. In comparison, Macy’s, Inc. (NYSE:M) inventory was up by just 3%. And we are not counting J. C. Penney, which lowered its stock by 9.3%.

Cost control

Another key to Macy’s success is its overall cost discipline. It has kept its cost of goods sold under control and achieved impressive gross margins of 38.8% during the first quarter.

Also, the company’s selling and general administrative expenses was 32% of sales compared to 32.4% in the year ago quarter. This led to an improvement in the operating margins from 6.4% in the year ago quarter to 6.8% in the current quarter.

Scoring above competitors

Out of the mall-based retailers like Nordstrom, Inc. (NYSE:JWN), J.C. Penney Company, Inc. (NYSE:JCP), and Macy’s, Inc. (NYSE:M), the latter has turned in the best quarterly performance.

Nordstrom, Inc. (NYSE:JWN) missed both the revenue and earnings estimates of analysts. It posted earnings of $0.73 per share on revenue of $2.75 billion. Analysts had estimated $0.76 per share on revenue of $2.81 billion. Same-store sales for the retail segment increased 2.7% as the company saw a quieter first couple of months.

While sales trends have improved in April, concerns remain over Nordstrom, Inc. (NYSE:JWN)’s increasing expenses, which are pressurizing margins. The company’s gross margin has declined from 39.7% to 39.1% during the first quarter, while operating margin fell from 10.4% to 10.0%.

As for J.C. Penney Company, Inc. (NYSE:JCP), the less we say about its performance, the better. It posted an adjusted net loss of $289 million, or $1.31 per share, while its revenue was down 16.4% year over year to $2.6 billion. Same-store sales growth was a negative 16.6%. Gross margin fell to 30.8% as the company stepped up its promotions in an effort to reverse its falling sales trends.

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