Macy's (M) well-regarded CEO Terry Lundgren has earned kudos from Wall Street analysts for steering the giant department store operator through an increasingly competitive retail environment. Now, though, breathing new life into the 156-year-old company is becoming an ever more daunting task.
For one thing, the number of shoppers going to malls -- where Macy's has long been dominant -- is dwindling, thanks to the rise of e-commerce sites such as Amazon (AMZN). Consumers are also increasingly on the hunt for bargains and in recent years have flocked to the off-price affiliates of some of Macy's biggest competitors such as Nordstrom's (JWN) and Saks.
In response, Cincinnati-based Macy's this year launched its own off-price offering called Macy's Backstage.
That was long overdue, according to retail expert Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm, which doesn't work for Macy's.
"Nordstrom very aggressively plowed (money) into the Nordstrom Rack stores," he said. "It's their entire growth vehicle. They are building way more (of them) then they are building Nordstrom's, and it's been tremendously successful. ... Saks has been building discount stores forever."
Macy's Lundgren has admitted being skeptical about the off-price business, telling a conference earlier this year: "I was the obstacle in the way here." However, he later realized the error of his ways, noting, "There is a customer who is going in this direction and not coming to our stores."
Macy's plans to open the first four Macy's Backstage stores in the New York City area this fall. But even as these stores open, others will be closing. Yesterday, Lundgren announced plans to shutter between 35 and 40 underperforming stores, more than triple the 14 it closed earlier this year. The company hasn't disclosed affected locations.
"That is a direct function of being in a slow-growth, going-nowhere segment called the department store business," said Davidowitz, "It's also a reflection of weak malls in America," adding that Macy's is in too many malls after its 2005 acquisition of May Co. in 2005, which doubled the size of Macy's. Davidowitz said May "didn't have the quality of locations that Macy's had. (Lundgren is) also cleaning up that problem."
Shares of Macy's, which operates 789 stores in the U.S., fell 32 cents, or 0.5 percent, to $58.85 on Wednesday. But it has long been a favorite of Wall Street because it has been one of the retail sector's stronger performers. Its shares posted a 41 percent gain in 2013 and a 23 percent increase in 2014. Unfortunately, its second-quarter results failed to meet analysts' expectations, and as a result Macy's stock has fallen more than 9 percent since the August earnings announcement.
In an interview with CBS MoneyWatch, Matt McGinley, an analyst at ISI Equity Research, cautioned investors against overreacting to Macy's problems.
"I wouldn't call one or two quarters of weak consumer demand in general the end of Macy's," said McGinley, who rates the stock a "buy." "They are still a gigantic retailer. They are the biggest department store operator. They are still generating $28 billion in revenues. It's not going away anytime soon."
Indeed, Lundgren is doing his part to make sure that's the case. Earlier this year, he acquired Bluemercury, a cosmetics and skin care retailer based in Washington, D.C. He also introduced My Macy's, an effort to get stores to buy merchandise that will suit the tastes of local shoppers. He has also beefed up its e-commerce operations.
While these moves are welcome, they aren't enough for some investors.
Macy's is facing pressure from activist holder Starboard Asset Management to spin off its real estate assets into a real estate investment trust (REIT), following in the footsteps of other chains such as Sears (SHLD) and Hudson's Bay. Macy's is currently studying a wide range of options for its real estate holdings, but it hasn't decided what to do next. The retailer had no timetable for a decision, according to company spokesman Jim Sluzewski.
Some analysts have argued that Starboard's proposal is a bad idea and will ultimately be rejected. "In our view, Macy's is accelerating investments in the right areas to drive (long-term) growth (off-price, off-mall cosmetics, e-commerce international)," wrote UBS analyst Michael Binetti, who has a "neutral" rating on the stock.
"And Macy's continues to generate solid returns to shareholders," he added. "That said, with growth initiatives likely not meaningful contributors until FY16 (at least), and our view that a large-scale real estate monetization is unlikely, we believe an improvement in core (business) trends is needed to support multiple expansion from here."
That's why it seems likely that Macy's will be sticking around the discount rack for a while.