Macy’s (M) has a three-bucket assortment strategy to deal with shifts in customer preferences

Shares of Macy’s Inc. (NYSE: M) have gained 66% since the start of the year. The retailer delivered better-than-expected results for the first quarter of 2021 and raised its guidance for the full year. Despite this, the stock has been in red territory and was down 1.7% on Wednesday.

Strong Q1

Macy’s’ net sales rose 56% year-over-year to $4.7 billion, beating estimates, and the company delivered earnings of $0.39 per share, on an adjusted basis, even as the Street had predicted a loss.

Digital sales totaled $1.7 billion in Q1, up 34% compared to Q1 2020 and comprising 37% of total sales. Mobile devices delivered around 60% of digital sales. Macy’s’ investments in its digital platform over the years are paying off well and the company intends to generate $10 billion in sales from digital by 2023.

General trends

The quarterly results were fueled by the US stimulus package and the rollout of vaccines. On its quarterly conference call, the company mentioned that customers started to rely more on cash and debit cards as opposed to credit cards thanks to the stimulus while the widespread distribution of vaccines led to an increase in store traffic as people get ready to spend more on social events and travel.

Macy’s managed to bring both new customers as well as dormant customers into its fold during the first quarter and also witnessed an increase in customer spend. In Q1, new customers totaled 4.6 million, which was up 23% compared to the same period in 2019. Of this, 3 million were brand new customers while 1.6 million were dormant customers who have re-engaged. Customer spend rose 8% in Q1.

The 3-bucket assortment strategy

Macy’s continues to shuffle the brands in its assortment to match the shifts in customer preferences. During the first quarter, the retailer witnessed some trends that might continue over the coming months and which give it a roadmap with regards to the expansion of its assortment. On its call, the company sorted these trends into three buckets.

Firstly, Macy’s said that many of the categories that saw strong growth during the COVID-19 pandemic have not yet seen a slowdown. The company continues to see demand for sleepwear and casual apparel as well as textiles and furniture within the home category. Luxury items like fine jewelry, handbags, fragrance, sunglasses and watches also remain popular.

Secondly, the categories which saw weakness during the pandemic are now seeing a recovery. Categories like dresses and sandals for women and tailored clothing for men are witnessing a pickup in demand as warm weather and vaccine distributions are giving people the confidence to step out and socialize again. In Q1, Macy’s apparel saw an 8 percentage point improvement from the fourth quarter of 2020. The category also saw a sequential improvement throughout the first quarter.

Categories like denim, shoes and handbags are also seeing improvements, along with swimwear and luggage as people get ready to travel again. Thirdly, Macy’s is seeing demand emerge in categories such as toys, pets, food and wine, and health and fitness, and the company is maintaining the flexibility it needs in inventories to capture additional spend with new and existing customers.

Outlook

For the second quarter of 2021, Macy’s expects net sales to come between approx. $4.9-5.0 billion and adjusted EPS to be $0.03-0.12. For the full year, net sales is now estimated to range between approx. $21.7-22.2 billion while adjusted EPS is projected to come in the range of $1.71-2.12.

Click here to read the full transcript of Macy’s Q1 2021 earnings conference call