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Macy’s Wants to Expand Into Toys, Pets + More New Categories — Why Analysts Think It Might Be Too Ambitious

Amid the COVID-19 health crisis, merchandise like toys, pet care and housewares saw a surge in sales as consumers worked and played from home. And it’s no surprise Macy’s is looking to expand into those categories — but some analysts think the move might be a little too ambitious for the challenged chain.

In yesterday’s first-quarter conference call, chairman and CEO Jeff Gennette noted “emerging opportunities where customers have signaled interest for us to expand our assortment.” Beyond the aforementioned categories, he added that the retailer could see potential in introducing food and wine as well as health and wellness items to its portfolio.

“We have the liquidity and flexibility in our inventories to respond to customer needs,” the chief executive said. “Our big focus on new and emerging categories is making sure we’ve got the right portfolio for this under-40 customer.”

However, according to experts, what might have been lucrative categories for other retailers might not necessarily translate into the same case for Macy’s. Speaking with FN, CFRA Research equity analyst Camilla Yanushevsky — who raised its price target from $7 to $15 but maintained a “sell” opinion on its shares — explained that the department store’s operating models and valuations are not sustainable in the long term.

“The remarks on the earnings call are more ambitions than actual concrete actions,” she said. “The company has a history of putting out very ambitious turnaround strategies, and they’re focusing on retail categories and strategies that have worked for other retailers, but they tend to go on too aggressively and then disappoint.”

She added, “I think the biggest back-and-forth on the earnings call between management and analysts was: Is the top and bottom line a one-off thing, or is it actually a turnaround?”

For the three months ended May 1, Macy’s logged adjusted earnings of 39 cents per share, compared with the prior year period’s loss of $2.03 per share. Revenues surged 56% to $4.71 billion. Both figures beat Wall Street’s expectations of a loss of 41 cents per share and sales of $4.37 billion.

In a statement, Gennette attributed the gains to the government’s fiscal stimulus, rapid vaccine rollout and the “accelerated execution” of Polaris — the three-year transformation strategy it unveiled at its investor day last year that involved trimming its brick-and-mortar footprint and ramping up investments in both higher-margin private labels and off-price through Macy’s Backstage.

However, some analysts have suggested that Macy’s turnaround still has a long way to go — and expanding into new categories now could divert its focus or potentially stall that growth.

“The pivotal question around Macy’s is how well will it recover from the pandemic?” posited UBS analyst Jay Sole, who gave the company a “buy” rating with a price target of $8. “How does the sell-side/market forecast FY22? Can Macy’s lap the big gains from stimulus and an unusually benign promotional environment? Can Macy’s maintain market share without taking SG&A back toward 2019 levels? Only time will tell, but our guess, based on conversations with investors, is the market will not assume a big reversal next year yet.”

JPMorgan analyst Matt Boss also gave the chain an “underweight” rating despite raising its price target from $16 to $17. “Macy’s top-line profile remains constrained by declining brick-and-mortar sales across the bulk of its full-line stores, with increased promotions and growing digital sales pressuring gross margin. Larger picture and multi-year, discretionary dollars continue to shift toward convenience (Amazon) and value (off-price), with lower visibility in the U.S. wholesale environment.”

However, Ilias Simpson, CEO of omnichannel tech and operations firm Radial, was more optimistic on Macy’s transformation strategy, which he said has needed to evolve since its introduction last February — just before the coronavirus outbreak touched down in the U.S.

“Macy’s strategy to expand categories and embrace omnichannel is a greater sign of agility rather than a diversion from their goals,” he said. “The fact is brands and retailers can’t be in business today without adopting omnichannel strategies … [Macy’s] move to focus on these categories just reinforces the company’s turnaround strategy to continue to revamp its assortments and focus on the consumer experience.”

In tandem with the release of its Q1 financial results, Macy’s raised its outlook for the full year: Now, it anticipates sales to range from $21.73 billion to $22.23 billion, compared with the prior projection of $19.75 billion to $20.75 billion. It also estimated that adjusted earnings per share would fall between $1.71 to $2.12, versus the previous expectation of adjusted earnings of 40 cents to 90 cents per share.

“Macy’s is a healthier business coming out of the pandemic than we were going into it,” Gennette said in the call. “Our accomplishments in the first quarter and the resulting momentum are clear signs that we’re making significant progress in our transformation. And all the positive signals in the macro environment further fuel our confidence.”

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