Macy's Miracle on 34th St? Or just a boost from a real estate sell-off?

After three years in the sales doldrums, Macy’s turned in some better-than-expected year end numbers that cheered Wall Street this week.

It's another Miracle on 34th Street!  Or is it?

Whatever the case, it was enough to cause an upbeat CEO Jeff Gannette to declare:

Macy's recipe for success is a healthy brick-and-mortar business, combined with robust growth in digital.

Now there are those who will regard that as a fine sentiment, but a possibly overly-optimistic reading of Macy’s position. A lot of the supposed turnaround has come from the ongoing sell-off of Macy’s bricks-and-mortar real estate. And while there’s still more of that to come, this source of income is not something that’s going to be there forever.

But Gannette argues that Macy’s has been putting in place some key strategic initiatives that will assist in delivering the online/offline mix for the long term. He points to what he calls “the re-engineering of the Macy's marketing machine”, citing the retailer’s new loyalty program Star Rewards as a case in point:

Our customers are responding enthusiastically, particularly at the Platinum level, which is our most valuable customer. In 2018, we will continue to strengthen our brand. We feel good about the next phases of our loyalty program, which will launch mid-year, including a tender-neutral option…we have some customers that don't want a Macy's credit card, but they want to be rewarded for having some level of allegiance to us, that they like our goods and services.

This all has wider knock-on effects in terms of cementing the relationship with customers, he adds:

It all leads to this conversation about lifetime value and starting not just to look at a transaction, but to really look at what that customer's spending with us over time. With what we can do with data analytics and personalization and customization and how we communicate with her, we have lots of opportunities to be able to seed new ideas and new things that she might be interested in based on her data trail. So lifetime value is really where we're going on this, as well as ultimately looking at are we bringing new customers into the Macy's tent, so looking at it on both ends.

Analytics and data are also at the heart of Macy’s efforts to improve price simplification across its inventory. Gannette refers to this as “science on pricing”, noting:

We made a big investment on analytics and pulling all of our pricing analytics together under one team. And our team is doing a great job with that. So we're really looking at what price we need to take something to. We look at what its weeks of supply is, what the out date is going to be, what we have to price that at. And so we're saving lots of markdown dollars. It's giving us the opportunity to respond to those things that are slower moving. And so we're using our markdown budget much more strategically than in times past, getting to the right price sooner. That's helping us clear out excess inventory.

I think one of the big headlines of our performance right now is the fact that we have less carry-over inventory of last season's goods. That gives us the opportunity to really respond to what's working in-season, be that a hot vendor or a hot trend. Our merchants are ready to respond with having budgets because they don't have a lot of carryover inventory. So it all is interlinked, but the pricing science has been a big win for us, and I think we're in the early innings of that. We're just going to keep getting better at it.

Customer tech

Back to the customer and the emphasis here is on tech that will improve the customer experience, says Gannette:

In 2017, we put a strong focus on improving customer experience through new service and delivery models, an expansion of Buy Online Pickup in Store, enhancements to our mobile experience and the use of AI to improve customer service. In 2018, we'll further scale a number of these, including the rollout of Mobile Checkout, At Your Service Centers across most of our doors. We know that we have an opportunity to offer our customer more product selection, curated and personalized to her taste, and we will expand her options on how and when to both explore and transact.

Then when you get into it is, you get into what technology expansion you want to do. This idea about Mobile Checkout, about can she find a register, if she wants to get out of that building quickly, she wants to scan everything on her mobile device and get out of the building without interacting with a sales associate, we want to make sure these 50 doors, that she can do that. If she wants to let us know through the app that she wants to have Star service and a Platinum experience, then we're going to have an At Your Service My Stylist that's going to be ready for her.

It’s all about getting rid of things that get in the way of the customer having a good experience when shopping, he adds:

We looked through all of the friction points that she experienced in her journey. Everything that she's been telling us over the years, places where she was dissatisfied with her experience, and we made sure that we attacked that, either through technology or through assortment…Today's consumer is discerning and [has] many choices. We are committed to being competitive and winning her business. The investments we will make in 2018 are focused on our customer and what she expects of us. They are strategic and directed towards the areas where we believe we can get the best return. We are rolling out things that work.

My take

That’s the plan at any rate. For now Gannette, a year into the CEO role, is in upbeat mode at the upturn in numbers. He reiterates his boast:

Macy's is its strongest and we have very robust digital growth and it's coupled with a healthy brick-and-mortar business. While we've had very strong digital business, we had opportunity in brick-and-mortar, so expect us to double-down our efforts and take the momentum that we have from fourth quarter into the new year.

But as Neil Saunders of analyst house GlobalData Retail puts it, this isn’t “a miracle on 34th Street” just yet:

This is not pessimism, but realism about Macy's situation and the context of the latest numbers…change is not yet established enough nor is it ambitious enough to drive a step up in performance. In essence, there is a long tail of shops that look dated, are in sub-optimal locations, and where the customer experience is poor. Macy's must remedy this if it is to transform the business…Macy's cannot just wait around for a miracle. Management needs the strength and will to engineer one.

In other words, it's going to take more than a letter to Santa to guarantee success just yet.