Is Macy’s Turnaround Gaining Traction or More of a Dead Cat Bounce?

This morning Macy’s beat quarterly earnings expectations and raised its guidance, sending its shares up dramatically in early trading.

Now, some 18 months into the department store’s “Bold New Chapter,” it’s worth asking the question: Is this clear evidence that the new strategy is starting to work?

Based upon what we learned today, my more charitable answer is somewhere between “maybe” and “it’s too soon to tell.” But my more skeptical side says “not really.”

Here’s why.

Green Shoots

To be sure, there was some good news. Both Macy’s Inc and the Macy’s nameplate stores experienced the best same-store sales growth in 12 quarters. In particular, Bloomingdales’s delivered another strong quarterly performance–though it probably got a nice bump from the on-going struggles at Saks Global.

Macy’s “Net Promoter Scores” for the second quarter were the best on record. Delivery speed meaningfully improved and the company’s inventories look to be in good shape going into the end of the year.

Anecdotally, my own experience visiting some of the “Reimagine 125” locations (those stores that are getting enhanced investment and priority in new initiatives) reveals noticeable improvements in sales help, visual merchandising, housekeeping, and the like.

That Don’t Impress Me Much

Having said that, even in the “Reimagine 125” stores, sales growth of 1.4% is not remotely close to the numbers being delivered by the competitors–TJX, Ulta, et al–that Macy’s has hemorrhaged market share to for well over a decade, nor the retail industry more broadly.

Given that these focus stores were presumably selected based upon their top quartile underlying characteristics (strong market dynamics and above average locations and physical plants) and are getting far more attention and investment than the average store, I’d expect the performance differential compared to the rest of the chain to be greater.

The company was also more promotional in the quarter, resulting in a 80 bps reduction in gross margin year-over-year. At the same time, there is evidence that consumers pulled forward some spending to get ahead of tariff impacts. It’s therefore not all that surprising that the company’s update guidance is for, at best, flat comparable store sales for its “go-forward” locations.

From an all-important profitability standpoint, the company lost ground compared to last year, despite a meaningful increase in its credit card operations.

Neither the sales nor the profit results are exactly signs of significant positive momentum.

The Challenge Ahead

To be fair, the problems at Macy’s run deep and even in the best circumstances won’t be addressed easily or quickly.

Most of its stores are way too big and many have not been meaningfully updated in a long time. A recent visit to a “First 50” location in one of the best malls in the country stands in stark contrast to a location just 12 miles away in a “B” mall. The latter location is adjacent to a vacant Sears store. It’s decor is reminiscent of what one might see in a “Stranger Things” episode. The Men’s and Home departments are almost comically large and devoid of customers. The Toys R Us department looked like a small explosion went off, even though the store had been open for less than an hour. The escalator was out and several exterior doors didn’t work. It was hard to find a sales associate.

Whether this particular location will ultimately survive the company’s store portfolio rationalization efforts remains to be seen, but if it does it will require substantial investment for it to win back business from the litany of competitors down the mall or far more conveniently located down the street. This scenario can be seen over and over again across the country.

Moreover, the sector Macy’s competes in has been contracting since the turn of the century. Middle class consumers are trading down under increasing economic pressures. Most of the competitors in the mediocre middle seem to merely trade a fair number of “promiscuous shoppers” back-and-forth who merely seek out the best deal.

Credit Where Credit Is Due

Under Tony Spring’s leadership there is more evidence of tangible progress than was true during the entirety of his predecessor’s tenure. The company’s decision to focus on a smaller number of locations where it can concentrate its scarce resources is a wise one. Moving the dial in such short time in a vast, complex organization that had lost its way is no small feat.

The question, ultimately, is whether what Macy’s labels “bold” is in fact bold enough to acquire, grow, and retain the large number of customers it needs to thrive, much less survive, in the future.

And that very much remains an open question.