A turnaround is a beautiful thing and that's exactly what has happened at Macy's (M) , the venerable retail chain that I think everyone's been pulling for and today the believers were rewarded with sharply better than expected earnings and a terrific outlook.
What happened here and is it sustainable?
First, Jeff Gennette, the CEO who came in literally less than a year ago, has worked remarkable magic on so many levels. He's made the stores look better. He's emphasized fashion. He's introduced a loyalty program, Star Rewards, which is working particularly at the platinum level. Many regular higher paying customers had begun to feel slighted. That's over. He's expanded Macy's Backstage, the off-price store and has seen a giant lift in sales. He's testing all new initiatives in 50 stores, and I am particularly drawn to "market at Macy's" which is their retail pop-up boutique story with in a store. That's working.
Customers came back to beauty, which includes high margin fragrance sales and prestige skin care, something that Este Lauder (EL) said was occurring when the dean of high luxury reported its quarter. Dresses, fine jewelry, men's tailored clothing, coats, children's shoes, hand bags, all doing better than expected leaving light inventories and a lack of promotion.
So, all systems go.
But is it sustainable? First Genette said the chain will be growing this year and already racked up a strong January. It's been ages since we've heard that.
Second, because of some success in the omnichannel -- double digit growth -- I see some force fields developing to the Amazon (AMZN) death star, with curated and personal shopping definitely helping. Amazon just doesn't have that.
When a retailer turns, as we saw with Kohl's (KSS) , it tends to be more than a one quarter affair. When these battleships get rolling they tend to feed on their own momentum.
But most important is something behind the scenes, something that caused us to recommend the stock when it fell below $19, some 10 points below where it traded, the balance sheet. Gennette knows fashion, he really does. However, what people missed about him, particularly the bears who questioned the sustainability of the balance sheet when the stock yielded 7%, is that Gennette cared passionately about fixing the darned balance sheet.
Gone was the addiction to buying back stock that's been the bane of so many retailers' existences. Instead the focus was a debt paydown, with $950 million retired. There's still more to do but Gennette is doing selling property using the experts from Brookfield, a real estate adviser, and I think the results have been spectacular with a lot more to come. The stock could get a lift every time properties are sold including one in San Francisco that could be worth a huge amount of money.
Plus the loser stores are almost done being culled, with only 17 of the original 100 stores slated to be closed in August of 2016 left to be shuttered. That means better gross margins ahead.
As someone who grew up in retail, with my mom working at Lit's and my dad at Gimbel's, before embarking on a 50 year career selling boxes and bags to smaller stores in Philly, I was immediately impressed with Gannette. Others seemed addicting to betting against the chain. Maybe they should have spent more time listening and less time wagering. They would have heard a story being told about what had to happen at Macy's over the next few years to revive it.
Gennette got it wrong. It took less than a year, although he would be the first to admit that the consumer is out spending and that's a gigantic positive. Shop there as I have, embrace it, you'll see exactly what I mean and what the bears were blind to in their pursuit for a home run short that turned out to be a home run long.
