Macy's Remarks Spark Selloff -- 2nd Update

Macy's Inc. met with investors on Tuesday to lay out its strategy. Instead, the department-store chain set off a new panic over the beleaguered retail sector.

The company's finance chief Karen Hoguet warned that Macy's gross margins would fall about 1% in its current quarter compared with a year ago and will decline slightly less than 1% for the full financial year. The remarks sent its shares tumbling 7% and, in a sign of the sector's fragility, dragged down other retailers as well, including J.C. Penney Co., Kohl's Corp., Nordstrom Inc., Target Corp. and Wal-Mart Stores Inc.

Margins are under pressure, Ms. Hoguet said Tuesday, because Macy's is taking longer than expected to clear excess inventory. She also noted Macy's was feeling the brunt of heightened promotions of beauty products and stalling watch sales.

The company had said in February that it expected margin declines but didn't specify the degree. It isn't lowering its sales and profit targets, planning instead to make up the difference through ongoing cost-cutting and efforts to improve the performance of its stores.

Chief Executive Jeffrey Gennette, who took the helm earlier this year, outlined some of those plans in what he called the "North Star Strategy."

Mr. Gennette wants to see Macy's reassert itself as a fashion authority with trendier merchandise, less-cluttered stores and a marketing plan less dependent on discounts. The strategy also calls for simplified pricing so shoppers don't have to do as much math to figure out what they are paying.

"We are committed to being a promotional department store but want the value to be clear," he told investors.

Some analysts wondered whether improving what is essentially an old-school department-store model would be enough to ensure Macy's survival in an age when retailing norms are being upended.

"While we appreciate these strategies, near-term fundamentals...are challenged," Jefferies analyst Randal Konik wrote in a research note.

In an interview, Mr. Gennette said Macy's is looking to the future by continuing to grow its digital operations but added that the company also needs to stabilize its brick-and-mortar stores.

One way he plans to do that is by opening more Macy's Backstage discount stores inside its traditional locations. Mr. Gennette said shoppers are making two additional trips to Macy's stores with Backstage space.

"Our assumption is that traffic will continue to be challenged," he said, so "whatever we put into that box that gets additional trips" will help.

In a nod to how difficult retailing has become, Mr. Gennette acknowledged that the strategy he laid out Tuesday, parts of which he had previously disclosed to The Wall Street Journal in March, won't be enough to return Macy's to growth. For that, the company is looking at new ways to interact and do business with shoppers, details of which it has yet to disclose.

"The growth will have to come from thinking outside the box," he said.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

Macy's Inc. met with investors on Tuesday to lay out its strategy, but ended up triggering a new panic over the beleaguered retail sector.

The department-store chain's finance chief, Karen Hoguet, warned that Macy's gross margins would fall about a percentage point in its current quarter compared with a year ago and decline slightly less than a point for the full financial year.

The remarks sent Macy's shares tumbling 8.2% to $21.90, their lowest close in more than six years, and -- in a sign of the sector's fragility -- dragged down other retailers as well, including J.C. Penney Co., Kohl's Corp., Nordstrom Inc., Target Corp. and Wal-Mart Stores Inc.

Retailers have been struggling with falling sales as more shopping shifts online. That has led to an unprecedented bout of store closures. Sears Holdings Corp. is closing 66 unprofitable stores in addition to the 150 closures announced this year, according to a person familiar with the situation. The closures include 49 Kmart and 17 Sears locations, this person said.

At Macy's, margins are under pressure, Ms. Hoguet said Tuesday, because Macy's is taking longer than expected to clear excess inventory. She also noted that the retailer was feeling the brunt of heightened promotions of beauty products and stalling watch sales.

The company had said in February that it expected margin declines but didn't specify their degree. It isn't lowering its sales and profit targets, planning instead to make up the difference through continuing cost-cutting and efforts to improve the performance of its stores.

Chief Executive Jeffrey Gennette, who took the helm earlier this year, outlined some of those plans in what he called the "North Star Strategy."

Mr. Gennette wants to see Macy's reassert itself as a fashion authority with trendier merchandise, less cluttered stores and a marketing plan less dependent on discounts. The strategy also calls for simplified pricing so shoppers don't have to do as much math to figure out what they are paying.

"We are committed to being a promotional department store but want the value to be clear," he told investors.

Some analysts wondered whether improving on what is essentially an old-school department-store model would be enough to ensure Macy's survival in an age when retailing norms are being upended.

"While we appreciate these strategies, near-term fundamentals...are challenged," Jefferies analyst Randal Konik wrote in a research note.

In an interview, Mr. Gennette said Macy's is looking to the future by continuing to build its digital operations but added that the company also needs to stabilize results from its brick-and-mortar stores.

One way he plans to do that is by opening more Macy's Backstage discount stores inside its traditional locations. Mr. Gennette said shoppers visit Macy's stores with Backstage space more often.

"Our assumption is that traffic will continue to be challenged," he said, so "whatever we put into that box that gets additional trips" will help.

In a nod to how difficult retailing has become, Mr. Gennette acknowledged that the strategy he laid out Tuesday, parts of which he disclosed to The Wall Street Journal in March, won't be enough to return Macy's to growth. For that, the company is looking at new ways to interact and do business with shoppers, details of which haven't been disclosed.

"The growth will have to come from thinking outside the box," he said.

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

(END) Dow Jones Newswires

June 06, 2017 19:26 ET (23:26 GMT)