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Morningstar | Burdened With Excess Selling Space in a Changing Market, We Maintain Our View Macy’s Lacks a Moat

We believe no-moat Macy’s is struggling to stay relevant, as consumers have many choices. We think its large fleet of almost 700 full-line stores that average about 180,000 square feet limits its options. While Macy’s operates stores in most top-tier U.S. malls, it also operates hundreds of stores in weaker malls. It does not need its vast selling space, as department stores have been losing market share to e-commerce (Amazon is reportedly the largest U.S. apparel retailer) and other retailers (outlets, branded stores, specialty stores, discounters). According to real estate research firm Green Street Advisors, sales at major department stores dropped 23% in the decade after the 2005 Federated-May merger, which created modern Macy’s, while mass merchant apparel sales increased 29% and off-price retail nearly doubled. Macy’s, which admits that two thirds of its customers also shop at discounters, has been forced to rely on discounts and coupons. We forecast Macy’s operating margins, which fell from 10% to 7% between 2014 and 2018, will average 6% over the next decade. Further, we forecast its sales (lower now than in 2007) will decline over the next 10 years.We think Macy’s response to market changes is insufficient. Macy’s is trying to leverage its strengths in its North Star plan, which includes store remodeling, real estate sales, improved e-commerce, and expansion of its Backstage concept. While the initiatives may be sound, we don’t expect them to bring in vast numbers of new shoppers. We note that Macy’s same-store sales have been weak even as e-commerce has grown. We think Macy’s has been slow to respond to competitive threats. It did not expand its loyalty program to non-Macy’s credit card holders until 2018, years after competitors had expanded their programs. Macy’s, moreover, reportedly considered an off-price concept in 2009 but did not open its first Backstage until 2015. Narrow-moat Nordstrom has opened nearly 200 off-price Rack stores in the past 10 years. While Macy’s reversed a trend of negative same-store sales in 2018, we view its holiday (owned) same-store sales of 0.7% as disappointing and evidence of a weak competitive position.