Macy’s Inc.'s (M, Financial) focus on improving the customer experience could catalyze its financial performance. The retailer is rolling out new in-store concepts in order to differentiate itself from competitors.
Its investments in an omnichannel offering could produce a better shopping experience, while plans to reduce inefficiencies in its supply chain may strengthen its competitive position.
While the stock declined 42% over the last year versus a rise of 8% for the S&P 500, its valuation suggests Macy's has turnaround potential.
Omnichannel investment
Macy’s ongoing investments in its omnichannel strategy could lead to an improving customer experience that strengthens its competitive position. For example, it is seeking to improve the features available on its mobile app in order to increase differentiation versus sector peers. As part of this initiative, it is working to more closely integrate in-store services such as My Stylist with its mobile app. This could create a more seamless omnichannel experience for customers.
The mobile app provides the company with data on an increasing pool of customers, having crossed $1 billion in app sales in fiscal 2018. This data can be used by Macy's to provide increasingly personalized deals and offers that lead to rising customer engagement rates.
In addition, Macy’s is set to focus capital and resources on categories where it has a high and growing market share. By focusing resources on the most profitable parts of its operations, it has the potential to deliver an improving return on investment.
Growth strategy
Macy’s use of the Story concept at its stores has resonated with customers. The retail concept, which launched in April, features a particular theme that changes every three to four months. This encourages customers to revisit the stores on a regular basis. The concept includes an events calendar and community outreach program that encourages customer engagement.
The company plans to expand its Growth50 concept to include 100 more stores, so that it becomes Growth150. Its Growth50 stores, which feature expanded in-store technology, localized products and improved facilities, outperformed the wider business in the most recent quarter. Expansion of the concept could catalyze Macy's financial performance while strengthening customer loyalty.
Threats
Macy’s financial prospects could be negatively impacted by an escalation of the trade war between the U.S. and China. Some of the company’s categories, such as furniture and apparel, may see production costs increase as a result of higher tariffs. Although there may be scope for the company’s manufacturing partners to absorb some of the additional costs, a large portion of them could be passed on to consumers. As retail sales have come under pressure recently, this may cause Macy’s sales performance to suffer.
In response, it is seeking to improve its productivity. For example, it is scaling up its "hold and flow" approach. This allows it to provide stores with an initial allocation of inventory and then reallocate it to stores where demand is highest. This reduces markdown risk, with the approach resulting in an increase in gross sales of 15% since implementation in fiscal 2018. It will also roll out a location-based markdown optimization pilot, which delivered positive results in the most recent quarter. Together, these refreshed inventory policies are expected to boost sales and reduce inefficiencies across the company’s supply chain.
Outlook
The company is forecasted to record a 4.5% decrease in earnings per share in the next fiscal year. Since it trades with a forward price-earnings ratio of 7.3, investors appear to have factored in the prospect of disappointing financial performance in the short run.
Macy’s investments in its omnichannel offering could strengthen customer loyalty through improving the shopping experience.
Its refreshed store concepts may lead to an improving return on investment, while investments in its supply chain could produce a more efficient business.
Having underperformed the S&P 500 in the last year, the stock appears to offer long-term recovery potential.
Disclosure: The author has no positions in any stocks mentioned.
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