Investors’ Reaction to Macy’s Q3 Earnings Sends Clear Message to all Brands
Macy’s gave investors every reason to cheer when the retailer announced fiscal third-quarter earnings early morning November 14. The fabled department store chain beat analysts’ expectations for sales and earnings. It raised its profit forecast for fiscal 2018. CEO Jeff Gennette predicted a strong holiday season, telling CNBC, “We are ready for the fourth quarter. I think the backdrop for consumer spending is good, their confidence is strong, the dotcom business is really humming . . . For stores, we are going into the fourth quarter in a healthy place with momentum.”
But Wall Street punished Macy’s, anyway. By the end of the day, its stock price had fallen nearly 3 percent — not a dramatic slide, but certainly a puzzling turn of events for a company that is entering the holiday shopping season with guns blazing.
What Went Wrong?
What could investors possibly be concerned about? After all, Macy’s did everything right. The company flawlessly executing on its strategy to maximize the profitability of physical retail spaces by:
- Closing stores and shrinking the size of others.
- Integrating high-priority digital technologies such as augmented reality, mobile check-out, and virtual reality to make the in-store experience better for customers.
Here’s the problem: Macy’s growth strategy of optimizing and shrinking its store space provides, at best, short-term results. But shrinking and optimizing store space is not a long-term growth strategy, and investors know it.
This story about retailers trying to grow by optimizing their real estate has played out like a slow car crash in various news stories over the past few months. The day before Macy’s announced its earnings, a Wall Street Journal article, “Macy’s Radical Plan to Save Itself: Shrink,” — may have provided the most eloquent summary of the situation in these lines from Steve Dennis, a former Sears Holdings Corp. and Neiman Marcus Group executive:
“If you’ve got too much space, it means your brand isn’t resonating. It’s not a real estate problem, it’s a brand problem.”
Macy’s said nothing to counter-balance this narrative on Wednesday’s earnings call, And it didn’t help Macy’s that Sears reported massive store closures only days before the Macy’s earnings call. So it shouldn’t be a surprise that investors responded negatively to Macy’s growth strategy. As Elizabeth Winkler noted in The Wall Street Journal’s Heard on the Street:
The lackluster response might have to do with Macy’s plans to shrink its lower-performing stores. As The Wall Street Journal reported on Monday, the retailer is reducing the size of some of its stores by as much as one-fifth to save money on staffing and inventory. That raised parallels with another iconic retailer, Sears, that filed for bankruptcy last month.
Macy’s, which discussed the plan publicly for the first time on Wednesday, has pitched the reduction as a way to improve consumers’ shopping experience. Analysts are less optimistic, saying it signals the brand’s weakness.
To grow long term, Macy’s needs to invest in becoming a more relevant brand that consumers love — brands such as Amazon, Costco, and Trader Joe’s were the only retailers that made into Prophet’s Relevance Index Top 50 out of 299 leading North American brands. Whether it’s the Prophet Brand Relevance Index or Interbrand’s annual Best Global Brands ranking (Top 100), it’s clear that companies need to take the investment and management of their brand as seriously as they do their financial performance — and the message investors sent to Macy’s this week shows why.
And Macy’s isn’t the only retailer that needs to think in terms of long-term brand relevance. Walmart and Target — I’m looking at you, too.
Review of Earnings
To give credit where credit is due, Macy’s is one of the more compelling comeback stories in retail. It had been written off for dead by 2017 only to punch its way back by cutting costs and changing its playbook. Its stock price began showing a gradual rise as the company embraced digital technologies and managed its physical infrastructure carefully. A year ago, Macy’s was trading at $20.35 a share. As of November 15, it was trading at $32.27 a share. Those two factors were in evidence when Macy’s reported fiscal third-quarter earnings:
Optimizing Its Store Space
Macy’s has closed stores, shrunk the size of some, and sublet its locations to other businesses in order to optimize the value of its physical locations. As we noted earlier this year, Macy’s has been rolling out stores within stores known as Backstage to cater to bargain hunters. Macy’s is also leasing some of its store space to other businesses including pop-up stores, and it is scaling back the size of some of its locations while keeping them fully functional. These changes are part of a “Growth50” strategy to rethink how Macy’s uses store spaces. In Macy’s earnings announcement, Genette said, “We continue to see an improved trend in brick and mortar across the fleet with particularly strong results from our Growth50 stores.”
Investing in Technology
As our own blog and CNBC reported, Macy’s is betting big on mobile, including the rollout of mobile checkout and the incorporation of augmented reality into its mobile app. Macy’s has also been investing in virtual reality to make it easier for shoppers to experience products virtually before they buy them.
“Like a lot of brands, we’ve experimented with VR in a number of areas and we’re excited to have found a practical application that has proven to drive sales,” Gennette said earlier this year. In addition, Macy’s noted that during a VR pilot test, shoppers returned less than 1 percent of furniture purchases (compared to 5 percent of the items being returned on average).
As noted, Wall Street wasn’t thrilled with the story for the third quarter, with the company’s stock price remaining depressed 24 hours after announcement day. The Street’s Dave Butler speculated, “I partly blame the volatility of the overall market for the cold reception along with the general continued fear of a retail apocalypse.” Michael Binetti, an analyst at Credit Suisse, said that investors might be worried that Macy’s might have peaked — in other words, the news is too good.
On top of everything else, expectations are high for a successful holiday retail season overall. eMarketer predicts that 2018 holiday spending will hit $1 trillion. Unfortunately for Macy’s, nothing less than a great holiday season will satisfy Wall Street in context of how the retail industry is supposed to perform in coming days and weeks.
A Painful Reminder
Wall Street’s reaction is a painful reminder that successfully managing quarterly financial performance is a lagging indicator. Brands instead need to focus on long-term relevance. A measure of success should not be how many stores you close but how well you rank in Prophet’s Brand Relevance Index. For its 2018 Index, Prophet surveyed 12,694 consumers across 299 brands and 37 categories to rank 50 shining examples of relevant brands. In Prophet’s assessment, the most relevant brands are;
- Customer obsessed (brands we cannot imagine living without).
- Ruthlessly pragmatic (brands we depend on).
- Distinctively inspired (brands that inspire us).
- Pervasively innovative (brands that consistently innovate).
The top five most relevant brands? Apple, Amazon, Pinterest, Netflix, and Android. Noticeably absent: Macy’s Target, and Walmart — all of which have made their brick-and-stores the linchpin of their omnichannel growth strategies.
So where do the traditional retailers go from here? Again, you have to give Macy’s credit: they are showing signs of real long-term growth by embracing mobile and digital, as are Target and Walmart. But are they moving aggressively enough, and is it too late for them to become relevant, lovable brands? As ex-Target vice chair Gerald Storch told CNBC, Amazon “wouldn’t have grown to the scale it is” had Walmart invested in online shopping earlier. As CNBC reported,
For example, Walmart recently paid $16 billion to buy a majority stake in Indian e-commerce company Flipkart. In late 2016, it paid $3 billion for then-startup Jet.com.
Amazon “certainly wouldn’t have grown to the scale it is, and they wouldn’t have got the lead they have” if Walmart had gotten an earlier start, said Storch, former CEO of Saks Fifth Avenue-parent Hudson’s Bay.
But to its credit, Walmart is moving in the right direction.
So if you’re a brick-and-mortar retailer, is it too late for you? Can you aspire to rank favorably — or at all — in the Prophet Brand Relevance Index?
The answer is yes.
Fortunately, tools exist to help businesses of all kinds embrace innovative strategies that lead to long-term relevance. At Moonshot, we use one of those tools, the design sprint, to help organizations quickly prototype customer-obsessed experiences designed to enable emotions. So much so, in fact, that we prefer to use the term minimum loveable product (MLP) vs. minimum viable product (MVP). As my colleague Mike Edmonds blogged recently, Google Ventures has popularized the use of the design sprint to explore, experiment, and validate new concepts with users. We have incorporated design sprints into a broader process called FUEL, which enables business to not only validate new products and experiences but scale them quickly. FUEL is not a magic wand that makes a company become more relevant — but this process can help a business accelerate its path to relevance long term.
Other innovation firms have their own approaches. FUEL is ours. Whatever you do, don’t let your company get complacent and fall into the trap of optimizing the business solely for financial metrics, it’s time to act now to accelerate your path to relevance.