Monday, 24 February 2020

The Iconic Macy’s Downgraded to “Junk” Status


Quite often here in Financial Regulation Matters, we have looked at the experience being faced by British retailers against the onslaught of online commerce but, of course, the experience is shared with American ‘bricks-and-mortar’ retailers. In this short post we will review the fortunes of one of America’s most iconic department stores – Macy’s.

Macy’s, founded in 1951 by Rowland Hussey Macy, is one of the most iconic American department stores. To provide some context for the marketplace, Bloomingdale’s is another iconic store but it operates under the Macy’s Inc. holding company, which used to be known as the ‘Federated Department Stores’ holding company before it purchased Macy’s in 1994 and re-branded. Macy’s Inc., in the last full financial year, recorded revenues of nearly $25 billion. However, earlier this month the company announced a set of plans to revive what are quickly becoming ailing fortunes. As part of what the company has labelled ‘Operation Polaris’, the plan is to shore up profitability by way of closing 125 stores over the next three years and targeting 2000 corporate job cuts, as well as shutting corporate offices. This marks a shift for the company, who will be moving its central headquarters to New York and, in the process, closing its Cincinnati base (as well as large offices in San Francisco and Ohio). The company’s CEO, Jeff Gennette, recently stated that the company had ‘significant work to do to improve the bottom-line’, and that the company hoped that the cuts would generate about $600 million of savings this year alone. Yet, for investors and onlookers, there is little to be excited by. A number of comments have been reported in The Financial Times, including ‘kind of the same thing – and it hasn’t worked’, to ‘nothing new [and it fails to] solve the major problems that plague Macy’s’.

Now though, it is the turn of the credit rating agencies to have their say, with S&P taking the lead. Both Moody’s and Fitch have the company at one grade above ‘junk’ status but for S&P, the time has come for the company to be placed in its non-investment grade category. S&P stated that the chain’s ‘competitive advantage has diminished more than we expected’ and that the downgrade ‘reflects our view that Macy’s improvement trajectory is weaker than our prior expectations and execution risks are elevated as the company pursues its Polaris strategic plan against an ongoing difficult industry backdrop’. A large proportion of S&P’s rating is based upon the understanding that not only are shoppers’ attitudes and preferences changing, but that the company has a large number of stores that it has acquired over the years that now leave it ‘saddled’ – the shares in Macy’s dropped nearly 5% on the announcement of the downgrade. Experts in the field doubt whether Macy’s has the managerial competency to save itself, with it being noted that its revival plans are well behind rivals such as Target, Costco, and Walmart who are facing similar pressures in the marketplace; a Marketing Professor at Columbia University recently remarked that ‘I know this sounds awfully critical, but Macy’s is a rudderless mess. Current and past management is truly clueless as to what to do to successfully position the company for the future’. Interestingly, rather than blame the online retail space for its woes, some experts have agreed that this is not necessarily the issue for Macy’s (who are doing quite well online), but that the issue is that they are failing to bring people into the stores by updating them and customising the experience for customers who do shop in stores; this is what they mean by poor management.

With the pressure building on the company, it will be interesting to see how they develop. It seems incredible that their only response to falling customer interest will be to cut jobs, stores, and offices but then not work to upgrade what they already have. The company is planning to invest in its online offerings and will build a new hub in Atlanta to service this offering, but it surely must seek to lead in the marketplace rather than react to the fear that the online marketplace will take over and dominate. People still shop in-store. However, if they are overlooked or have their experience essentially limited because the company are concentrating on other matters then, of course, they will stop coming. Macy’s seems to be at an important cross-roads in its development and its identity, and particularly how it perceives its own identity, will likely be the key to its future success.

Keywords – Macy’s, Retail, business, cuts, @finregmatters

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