Amid a changing landscape, Macy’s (M) gears up to change its strategy for the remainder of 2022

Shares of Macy’s Inc. (NYSE: M) were down over 3% on Wednesday. The stock has dropped 29% year-to-date and 21% over the past 12 months. On Tuesday, the company reported its second quarter 2022 earnings results, which declined versus the year-ago period but surpassed market expectations.

The highlight of the report was the company’s slashing of its full-year outlook mainly due to concerns over a reduction in discretionary spend in the coming months. As the broader environment continues to change post-pandemic, the retailer is modifying its strategy to adapt as it makes way through the second half of the year.

Performance and change in trends

The retail industry is witnessing changes in consumer behavior against a challenging macroeconomic environment. During Q2, Macy’s saw weakness in overall consumer discretionary spending compared to the prior year as customers across all income tiers slowed and shifted their spend towards more essential items amid high inflation.

Consumer spend also shifted from goods to services as people chose to spend on vacations and dining out in a post-pandemic world. Macy’s Q2 net sales dipped around 1% year-over-year to $5.6 billion. Comparable sales were down 1.6% on an owned plus licensed basis.

The company witnessed a slowdown in categories that were popular during the pandemic like active, casual sportswear, sleepwear and soft home. Sales in these categories were down 18% compared to Q2 2021 and down 12% versus Q2 2019.

Meanwhile, occasion-based categories such as shoes, dresses and luggage gained momentum during the quarter. Sales in these categories increased 8% year-over-year and 21% versus Q2 2019. The spending patterns around occasions like Mother’s Day and Father’s Day were also encouraging as inflationary pressures did not deter people from celebrating special moments with friends and family. In the two weeks leading up to both holidays, categories such as dresses, beauty, shoes, and men’s fragrances gained 9% over last year.

In addition, customers have returned to stores for shopping in the post-pandemic world. This led to a 5% decline in digital sales and a 3% drop in conversion versus the prior year. However, digital sales were up 37% and conversion was up 14% compared to Q2 2019.

Macy’s delivered adjusted EPS of $1.00 in Q2 2022. This was lower than $1.29 in Q2 2021 but significantly better than the $0.28 reported in Q2 2019.

Outlook and strategy

Macy’s is changing its strategy to adapt to the current environment. The company plans on bringing fresh inventory in categories that are seeing higher demand. It aims for more than 55% of its offerings to be new during this year’s holiday season, which will be up over 30 percentage points from the holiday period of 2019.

Macy’s plans to expand its Toys “R”Us partnership to all its locations in time for the holiday season. The company sees a fair share market opportunity of $1 billion in annual sales in the toys category. The retailer is working on repositioning its physical store footprint to support omni-channel market sales growth. It will also launch a new ecommerce marketplace in a few weeks which will have a wide range of products in home, pets, beauty, health, toys and electronics.

Macy’s anticipates a challenging macroeconomic environment throughout the year. The company expects a reduction in consumer discretionary spending as inflation increases and wage growth fails to keep up. In addition, as part of its efforts to drive faster sell-through in its aged inventory in seasonal goods and pandemic-related categories, Macy’s will have to use markdowns and promotions.

These factors led to the retailer cutting its outlook for the full year of 2022. Sales for FY2022 are now expected to be $24.3-24.6 billion and adjusted EPS is expected to be $4.00-4.20 compared to the previous ranges of $24.4-24.7 billion and $4.53-4.95 respectively. For the third quarter of 2022, Macy’s expects net sales of $5.16-5.23 billion and adjusted EPS of $0.15-0.21.

Click here to read the full transcript of Macy’s Q2 2022 earnings conference call