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Macy's shares plunge 8% as company warns margins might continue to erode

Macy's shares plunge 6% as company warns margins might continue to erode

Macy's Chief Financial Officer Karen Hoguet warned analysts Tuesday that the department store's gross margin could be below a forecast given in February.

Gross margins are now expected to be about 60 to 80 basis points below last year. The company plans to offset this pressure with cost savings, and Hoguet said the company is still comfortable with the sales and profit forecast it provided in February.

But the pressure on margins was a sign to investors that the pressure on department stores hasn't eased in the second quarter of the year. Following Hoguet's comments, Macy's shares began to sell off and ended the day down more than 8 percent. Other department store stocks also were trading lower on the news, including J.C. Penney, which closed down 4 percent, and Kohl's, which ended the day down nearly 6 percent.

Hoguet and Macy's new CEO Jeff Gennette were meeting with analysts to discuss the department store's future strategy. It's Macy's first analyst meeting in four years, and it comes little more than 10 weeks into Gennette's tenure.

"I have tremendous faith in the power of the Macy's brand and brand's ability to strengthen its bond with customers," Gennette said as he shared his personal observations as a 34-year veteran of the department store. "We don't have all the answers, but we are working hard to figure it out."

Gennette further detailed his "North Star Strategy," which was shared with Macy's 140,000 employees in March. He used the five points of the Macy's star logo to illustrate his strategy on changing marketing, merchandise, experience, the interplay between stores and online and lastly "what's new, what's next," or where Macy's is experimenting.

"We don't always communicate effectively with our customers," Gennette said, as he explained that Macy's is tweaking its marketing message, adding that the retailer doesn't "get credit for our great pricing."

He said while Macy's will continue to be a department store that offers special event sales, it's working on simplifying the pricing for shoppers and targeting different shopper groups for different events.

Later in the year, the department store will begin to roll out a new loyalty program but didn't share much on its details just yet.

Macy's has been changing the merchandise it offers, both cutting back the amount by eliminating some duplicate items and focusing on its more trendy fashion items than basic clothing.

Macy's is also working on improving its exclusive brands like Tommy Hilfiger and DKNY and its private label brands like I.N.C., Hotel Collection and Martha Stewart. Since these brands can only be purchased at Macy's, they can also be more profitable because there aren't identical items to comparing pricing with at other retailers.

Right now its exclusive and private label brands together represent 29 percent of sales. Gennette's goal is for that to grow to 40 percent by 2020. As the percentage of private and exclusive products grows, so too will Macy's gross margin.

The retailer also said it has added "BackStage" sections to 26 stores, and plans to add 19 more this year. The goal pf these sections is to offer shoppers a similar pricing structure to what they would find at an off-price retailer like T.J. Maxx or Burlington. To complete the experience, some merchandise categories with BackStage are supplemental, including home décor and beauty options, not found in the rest of the store.

Gennette explained that while the addition of a Backstage section in Macy's stores is lifting net sales by an average of 6.4 percent in locations opened in 2017 and 4.6 percent lift in those opened in 2016, it hasn't yet brought in new customers. Instead, it is generating additional trips to stores.

Off-price retailer have been on challenge for Macy's. The other has been the shift of consumers to buying more online and spending less time at the mall.

When asked about how Macy's plans to combat Amazon as it grows its expertise and share in apparel, Gennette replied: "There is a place for both Macy's and Amazon to succeed with our customer.

"As [Amazon] develop(s) competency in apparel we will stay ahead in fashion," he said.

But right now, Macy's is struggling. The retailer's stock has tumbled more than 34 percent over the past year but is down 37 percent in the year-to-date period.

"While we appreciate these strategies, [near-term] fundamentals matter most to us, which are challenged with declining comps and deteriorating margins," said Randal Konik, an analyst at Jefferies, in a research note, following the meeting.

Konik said he remains cautious given the industry's headwinds, and that it will be difficult for Macy's to improve its margins (and boost its profitability) when it's having to invest in long-term initiatives.

"The lack of upward EPS revisions, offset by further real estate monetization, keep us hold- rated," he said.

In the fiscal first quarter, Macy's reported a 39 percent drop in quarterly profit. The earnings were hurt by slumping sales and higher inventory, which weighed on its margins. Same-store sales — a closely watched metric for retailers — fell 4.6 percent during the quarter.

Macy's expects its same-store sales this year will be down between 2 and 3 percent. Total sales are expected to sink 3.2 to 4.2 percent, while adjusted earnings should be in the range of $2.90 to $3.15 a share.

The company reiterated this forecast Tuesday.