The miracle is real? A "different Macy's" omni-channel transformation delivers the goods

The ‘Miracle on 34th Street’ is looking good for Macy’s as it turns in soaring revenue and profit growth on the back of deciding not to spin off its e-commerce operation.

Q4 2021 net income was $742 million, up from $160 million for the comparable quarter last year, while revenue was up 30% year-on-year from $6.78 billion to $8.66 billion. Full year revenue was $24.46 billion with net income of $1.43 billion against a full year 2020 loss of $3.9 billion.

Other stats of note:

• 44 million customers shopped with Macy’s across 2021.
• 7.2 million new customers shopped with Macy’s during Q3, up 11% year-on-year.
• 58% of those new customers came via digital channels.
• Digital penetration is now 39% of net sales.
• Macy's app had an 81% sequential increase in downloads over Q3 2021.
• More than 58% of geographic markets with Macy’s stores saw omni-channel sales growth over Q4 2019 levels.

The retailer's strong performance coincided with a decision not to spin off Macy’s e-commerce arm as a separate business, something that hedge fund activist investor Jana Partners had been pushing for. In its financial release, Macy’s confirmed that a full operational review of options had taken place:

Ultimately, based on the work completed, the Board determined that an integrated, omni-channel Macy’s, Inc. with an acceleration of certain Polaris initiatives, will deliver greater value to our shareholders than a separation of digital and physical assets at either the enterprise or brand levels. Key to the Board’s decision-making were the high separation costs and ongoing costs from operating separated businesses, as well as high execution risk for the business and the company’s customers.

Accelerating 

What will now happen is a further acceleration of the Polaris omni-channel transformation strategy that CEO Jeff Gennette says has been instrumental in turning Macy’s fortunes around:

Our business has changed dramatically since 2019 when we began to lay the groundwork for our Polaris strategy. We stayed focused on that plan, and we have delivered. We are now more digitally-led and customer-centric in our planning and execution. We have also demonstrated the value of an integrated company, meeting customer expectations for a more seamless shopping experience across digital and store offerings. Digital has been a particular priority for us.

There have been some key milestones passed, he adds:

Number one, we have modernized our digital platform and now offer an engaging and convenient experience with the power to meet customers whenever and however they choose to shop. In 2019, our digital team worked as a siloed organization; today, it is fully integrated. We have a scaled platform, operating the #2 website in our categories in the nation, with 39% digital penetration, an increase of 9 percentage points versus fourth quarter of 2019.

The firm’s store real estate fleet has also been given a new role as the e-commerce business has evolved, says Gennette:

Today, the consumer is increasingly more omni-channel, and we are focused on establishing the more appropriate footprint in markets to drive sustainable and profitable omni-channel growth…In addition to being a place for discovery and shopping, our stores are also fulfillment hubs, supporting our digital operations through Buy Online, Pickup in Store, Curbside Pickup and Same-Day Delivery. 

And against the backdrop of the global supply chain crisis, Macy’s has benefitted from executing on a pre-COVID plan to integrate its previously segregated offline and online inventories. This has enabled the firm to break its reliance on a distribution network that Gennette admits lacked efficiency:

Today, as a result of our investments, we have a more modern supply chain network that is agile, data-driven and increasingly automated. We've seen the results of this work pay off throughout 2021 from increased speed of delivery to operational efficiency and to better inventory utilization.

There’s also been a deep focus on data and analytics, he adds:

We have invested in advanced technology and data science throughout our operations, enabling us to increase productivity and profitability of the entire business. To best realize our strategic goal of building profitable lifetime customer relationships, we successfully built a new enterprise data and analytics organization that is helping us to embed data and analytics into everything we do. We have already seen improvements in our efforts around personalization and pricing.

As for that decision not to launch a separate e-commerce operation, Gennette explained:

In every scenario we considered, we found that the combination of our profitable digital platform with our national footprint will deliver greater value to shareholders than a separation of our digital and physical assets. This was true at both Macy's, Inc. and brand levels…We determined that Macy's, Inc. has a stronger future as a fully integrated business with Macy’s and Bloomingdales together and assessing a broad range of brands, price points and customers across digital and stores.

Getting personal 

So the focus, as noted above, is now on further transformation under the Polaris initiative. That’s going to come at a cost of around $3 billion over the next three years, with the money being sunk primarily into technology architecture, data science applications across the firm’s retail operations, digital platform enhancements, fulfillment capabilities in stores and further upstream, and personalization efforts.

That last element is a priority, said Gennette:

The real focus that we have right now on customers is taking the 19.4 million customers that came into the brand in 2021 and getting a second and third and fourth purchase from them. So, really working through all of our personalization techniques and seeding content that could be of interest to these customers to make sure that they're not ‘one and done’. Because you've got the bulk of them that are coming in via digital, the majority of them now are younger and more diverse. So making sure that we get a second purchase out of them and using our data and analytics technology and personalization to see that content.

My take

We are a different Macy's, Inc. today than we were in 2019 - more agile, more profitable and more relevant to our customers.

That’s a justifiable boast from Gennette. Looking back a few years, Macy’s long term survival prospects looked pretty dire. It’s been a painful journey - and given the ongoing disruption in the retail sector as a whole, there’s no guarantee there won’t be more pain to come - but the latest numbers and proof-points coming out of the firm look like validation of successful execution of a bold omni-channel transformation.

Rejecting the pressure to spin off the e-commerce business also looks like a sensible move. (It will be interesting to see if this decision assists Kohl’s in its battle against its own activist investors to execute a similar spin-off.)

There’s more to come - the firm’s marketplace initiative with Mirakl will kick in later this year. The only downside at present remains pressure on the tourist trade business that the flagship Macy’s outlets have tapped into for so long. While travel is returning in the Vaccine Economy, the emergence of new variants, such as Omicron, are likely still to inhibit that arm of the business for a while yet and rising inflation in the US may well dampen down consumer spending for higher end apparel.

But overall, the ‘Miracle on 34th Street’ is looking pretty real and increasingly an omni-channel exemplar for others in the retail sector...and we wouldn't have said that a few years ago.