Macy's online sales growth slowed. But that also means it's more profitable

Key Points
  • Macy's says its online growth slowed during the fiscal third quarter.
  • As a result, the retailer says, it had a "lower-than-expected headwind from delivery expense associated with our digital business and loyalty program."
  • Macy's earnings top expectations.
People walk past Macy's flagship store in Manhattan, New York.
Xinhua | Wang Lei | Getty Images

Macy's online business is struggling.

The company didn't break out the exact growth rate for its online sales during the fiscal third quarter, when for the past few quarters it has highlighted double-digit growth.

Instead, it said there was a "slowdown ... but it absolutely did grow in the quarter," according to President Hal Lawton.

Conversion rates, or the pace at which a shopper becomes a buyer, online fell.

Lawton attributed that drop to a few factors. There was warmer weather at the start of the fall that led to lower-than-normal sales of cold-weather gear, and the "promotional intensity" by peers meant some shoppers ultimately went elsewhere, where they could snag better deals. Macy's also rolled out a handful of updates to its website during the quarter, such as launching same-day delivery in 33 U.S. markets and adding new navigational features, which led to a few glitches.

With these hurdles behind it, however, conversion rates have improved ahead of the holidays, according to Lawton.

Ironically, for Macy's, there is one bright spot in all of this. CFO Paula Price said Macy's had a "lower-than-expected headwind from delivery expense associated with our digital business and loyalty program" during the latest quarter.

A strong online business has proven to be a blessing and a curse for retailers, because transportation costs and returns, among other things, end up weighing on profitability.

Macy's was able to top analysts' earnings expectations, while the rest of its report on Thursday was mostly bad news. Same-store sales declined for the first time in two years.

Its gross margins ended the period at 40%, down from 40.3% a year ago and slightly better than a forecast for 39.9%. In addition to lower delivery costs, the company attributed some of this improvement to the fact that it was able to clean up excess inventory.

There are other ways for retailers to grow their online business profitability, as Target showed just a day earlier.

When it reported earnings on Wednesday, Target said it was finding ways to cut costs by as much as 90% by fulfilling online orders from the backs of its stores and getting more people to use a curbside pickup service when they shop on the web. Target's online sales were up 31% during the latest quarter. Walmart's were up 41%.

That trend could be good news for Macy's, as it ramps up the improvements it has made to its website and grows a suite of delivery options. This will be the first holiday that some shoppers can use same-day delivery by Macy's. So it remains to be seen whether this can be a boon to online sales.

Looking to the fourth and holiday quarter, Macy's CEO Jeff Gennette said Macy's is planning to be competitive with its deals, when it "didn't chase some of [its] competitor's promotions" during the third quarter.

"We expect a very competitive and difficult holiday quarter for the department store segment," Retail Metrics founder Ken Perkins said.

Macy's shares were last down about 3% in trading Thursday, having fallen more than 51% this year.

Macy's reports first negative comp sales in two years