Macy's Finds Potential for Market Expansion Amidst Pricing Chaos Caused by Tariffs
Macy's Inc. announced better-than-anticipated Q1 results, reporting a 5% year-over-year decline in net sales to $4.6 billion, with comparable sales dropping 1.2%. Credit card revenue increased by more than 31% to $154 million, while Macy's Media Network net revenue grew 8.1% to $40 million.
Bloomingdale's saw a 2.6% rise in net sales and a 3.8% increase in comparable sales. Bluemercury recorded a 0.8% increase in net sales and a 1.5% growth in comparable sales, marking its 17th consecutive quarter of comparable sales growth. Macy's namesake net sales fell 6.5% and comparable sales dropped 2.1%, primarily due to store closures. Excluding stores scheduled for closure, comparable sales decreased 1.9%, while at the 125 overhauled "Reimagine" stores, comparable sales dropped 0.8%.
Inventory levels were almost unchanged, declining 0.5%. Gross margin remained steady at 39.2%, as improved merchandise margin was offset by higher delivery costs. Net income dropped 38.7% to $38 million.
Macy's executives are cautiously optimistic, as they navigate the unpredictable consumer behavior landscape. CEO Tony Spring sees potential in the era of tariffs, provided customers find the right products at the right prices. This has led to negotiations with vendors, adjustments in supply chain management, and a focus on price sensitivity.
At the end of the previous year, about 20% of Macy's Inc. inventory was sourced from China, with national brands accounting for approximately 18% and owned brands accounting for 27%. Last year, nearly a third of private labels were manufactured in China, but this number has since decreased.
The full impact of tariffs on prices is yet to be fully realized, with little impact seen in the first quarter. However, these effects are gradually being felt, according to Spring. Macy's Inc. estimates that tariffs, as currently structured, will erode about 20 to 40 basis points from annual gross margin. This calculation includes inventory purchased under the 145% China tariffs, joint costs with suppliers, vendor discounts, and selective price increases, but not potential tariff increases on goods from the European Union or other countries.
Macy's Inc. has stronger relationships with vendors compared to previous times, and both Macy's and Bloomingdale's have opportunities to capture market share, Spring asserted. However, the retailer is not stockpiling inventory to avoid tariffs.
"As a multibrand, multicategory retailer, we have a lot of options," said Spring. "If something isn't competitively priced, we won't purchase it. If a price point is crucial, we'll hold it. We'll engage in fair and aggressive negotiations with our partners, as well as with our factories. At present, I feel optimistic about how we've positioned our pricing and inventory for the remainder of the year, but we'll deal with each situation as it arises."
Fitch Ratings Senior Director David Silverman expects Macy's and other retailers to exhibit caution in inventory management and pricing, as they navigate the current market conditions. Silverman sees potential for Macy's to gain market share.
However, concerns remain about the performance of Macy's Reimagine stores, as their Q1 comparable sales declined. GlobalData Managing Director Neil Saunders considers this slightly concerning, given the importance of these stores to Macy's Bold New Chapter strategy.
"In our view, management can be given leeway at this stage, as it is still early in the reinvention timeline and the market is becoming more challenging," said Saunders. "Nevertheless, Macy's stores require more newness and unexpected brands to compete effectively with assertive retailers like Dick's and Nordstrom."
When asked about potential improvements to Reimagine stores and the possibility or timing of adding more stores, Spring provided few details, stating that additional information would be shared as the year progresses.
- AI-driven negotiations and supply chain management adjustments are being prioritized by Macy's executives, as they aim to navigate the tariff era, ensuring competitively priced products for consumers.
- The retail industry's finance landscape is being reshaped by the ongoing pandemic, with retailers like Macy's focusing on price sensitivity and forging stronger relationships with vendors to capture market share.
- Despite the initial minimal impact of tariffs on prices in the first quarter, Macy's Inc. anticipates a potential erosion of 20 to 40 basis points from annual gross margin, due to increased costs and selective price increases.
