At last week’s JP Morgan Chase Annual Retail Roundup, Macy’s CFO Adrian Mitchell laid out a very clear-eyed path forward, recognizing the obstacles and issues. He also identified numerous opportunities Macy’s is preparing to capitalize on, expressing the need for agility in uncertain times.

I heard personalization, localization, off-mall smaller formats, (including Market by Macy’s, Bloomie’s and Backstage), reimagining real estate assets, an expanded and curated digital third-party marketplace, decentralized decision making, inventory optimization, and continued growth in Macy’s Media Network. In short, I heard a lot of visionary ideas and a lot of work to get it done.

Winds of Change

Mitchell did acknowledge headwinds indicating the need to be agile as they move forward.

The biggest challenge that Macy’s has in terms of thinking about managing through the beginning of 2022 is where is the demand going to come from? Macy’s believes the demand is out there and that the consumer is going to be spending. But are they going to be spending on discretionary items that Macy’s sells?

One macro question he posed was: “The biggest challenge that we’ve had in terms of thinking about managing through the beginning of 2022 is where is the demand going to come from? We do believe the demand is out there. We do believe that the consumer is going to be spending. But are they going to be spending on discretionary items that we sell? Or are they going to be spending on an airline ticket to Florida or going out to restaurants more? So that level of unpredictability is something we just have to be very measured around.” This, of course, is the core issue for the entire industry.

Mitchell cited specific headwinds facing Macy’s and retail in general:

• Continuing evolution of Covid-19
• Inflationary pressures on both Macy’s and consumers
• Continuing supply chain disruptions (the war in Ukraine as an unknown)
• Uncertain industry-wide promotional behavior
• Competition for talent
• End of stimulus money

On the other hand, there are favorable tailwinds:

• Consumer demand will remain healthy as the job market improves and wages continue to rise
• As people return to the office and events, demand will increase, particularly in the apparel and accessory categories
• The full recovery of international tourism to pre-pandemic levels

Good Neighbors

Personalization, localization, off-mall smaller formats and reimagining Macy’s real estate assets are all ideas that focus on physically expanding Market by Macy’s, Bloomie’s and Backstage brands (30,000 to 50,000 square-feet) into neighborhoods (read convenience).

Macy’s has 10 developers who are reimagining how to convert select stores across the country into mixed-use properties, or turning other properties including parking lots into restaurants, offices, residences or other such concepts.

Personalized Service

While Macy’s has had personal stylists for years, they have elevated this service to a more strategic and formalized level. They recently launched what they call the “Own Your Style” program. It’s a strategy geared to project fashion authority and serve customers on a more individual basis.

Rich Lennox, Macy’s chief brand officer said, “We will help our customers express their personal style through personalized data-driven recommendations and expert advice that will differentiate us in a cluttered marketplace. This brand transformation will enhance our customer’s shopping experience with more personal touchpoints and offer them true value and style that they can own.”

Macy’s also changed its dress code for its colleagues, so they can better express their personal style and encourage customers to do the same.

And in a conversation I had with Marc Mastronardi, EVP, Macy’s Chief Stores Officer, he said this personalized service will be rolled out to every Macy’s consumer touchpoint, both digital and physical, and including the off-mall small store formats (Read: personalized experience).

The Promotional Conundrum, Inflation, and Inventory Personalization

Another major shift is decentralizing promotional decision making from five regional structures to the individual stores. Mitchell said, “We’re also being very thoughtful about how we navigate the promotional intensity. The pricing science for us is actually quite important. So, if you think about pre-2021, a lot of what we had in terms of our pricing sophistication was in five regions, where in each region the pricing cadence was fixed.

“The [promotional] depth was fixed— 25 percent off on the first markdown, 50 percent off on the second. The entire region, regardless of sell-through rates and inventory availability by location, had been just much less sophisticated. By the end of this year, however, Macy’s will have a very different pricing cadence, where any given store location or local market will have the ability to control its pricing, as opposed to pricing changes on a regional level. It just gives us a lot more flexibility to kind of manage areas where we may have excess inventory and manage demand and margins where we have less inventory.

“There is no question in our mind that we’re likely going to be moving into a more promotional intense environment. There’s still uncertainty. There’s still pressure on the consumer. Even though the consumer is healthy, we do see that inflation is elevated more so than what we expected coming into the year.

“And we also recognize that the supply chain disruptions are not solved. Even though it’s better than months ago, there are still challenges. There are still delays. For us, it’s about pivoting away from broad-based promotions and getting into much more personalized offers. We can maximize margins better. We can speak to the customer in a way that they’re engaged and active and engaging on product that is relevant for them.”

Expanded Digital Marketplace

Macys.com and bloomingdales.com launched a third-party digital marketplace strategy. They will be curating and expanding select third-party product categories aligned with each of their core customers’ desires, which Mitchell said is “a whole new ecosystem and a whole new capability for us.”

Macy’s Media Network

In August 2021 Macy’s launched its media network as a new revenue stream essentially selling advertising to its macys.com and bloomingdales.com vendors. Speaking to analysts, CEO Jeff Gennette billed the service as “a new fashion and beauty publishing model.” An in-house advertising team runs the platform, which offers formats like sponsored product, website display and physical media ads. It combines existing loyalty capabilities through its Star Rewards Loyalty program with digital advertising, which also capitalizes on obtaining first-shopper data which is then used to upsell ads to vendors. While the revenue is still small compared to giants Google and Amazon, Macy’s has an advantage over digital pure plays by using its physical stores as additional advertising platforms.

Back to the Unknowns

Back to Mitchell’s core question about consumer demand: Will it be strong enough in the face of all the headwinds. And how will the demand be satisfied? Goods that Macy’s sells, or travel, leisure, entertainment, dining out, etc.?

Mitchell commented, “On the uncertainty side, the things we are looking at are record inflation, the lack of stimulus, the increase in interest rates, instability in the stock market and challenges with the war in the Ukraine.

“When we look at the low- to middle-income customer, we think there is more pressure. On the other hand, higher income customers seem to be resilient and continuing to spend as they

progress through 2022. Domestic tourism is really healthy. People are traveling, going on spring break, going to see family. We feel really good about the momentum.”

Is Macy’s Trending?

I started this article by mentioning the many positive strategies CFO Adrian Mitchell outlined in his presentation. I also said that it would require a lot of work: read implementation. Having lost a year as a nonessential during 2020, I do believe they are coming out of a recovery year and are poised to take off down a long runway.

Spoiler alert: This is a strategic perspective, not a financial review – on purpose.

The current three-front perfect storm for Macy’s and Kohl’s could arguably be described as a pursuit of a post-Covid higher level of positive “normal,” managing through inflation and supply chain impediments, and the threat of greedy activists. And the major stories coming out of their recent investor presentations were their focused repositioning strategies, aligning merchandising and distribution with young consumers’ preferred products, and enhancing shopping experiences.

Target

Target has proven my often predicted “localization” and “personalization” strategy as critical for success among legacy retailers who are in the process of transforming. As an essential retailer during the pandemic, Target gained time and a capital advantage, which they brilliantly put to use by investing heavily in perfecting their omnichannel model, ramping up on their youth-focused national and private brand initiatives (including the launch of Ulta Beauty’s in-store shops), and most importantly, rapidly expanding their local, neighborhood small-store strategy. As of 2019 (no recent updates available), there were over 100 small stores (an average of 40,000-square-feet), about 23 on college campuses, and their strategy is to add 30 to 40 a year. According to Cornell, “We’re opening up Target stores near America’s most iconic tourist destinations: Times Square, Disney World and the Las Vegas Strip. Because we learned from our store at Herald Square, there are few places that help travelers feel more at home than Target.”

Macy’s

At the recent UBS Global Consumer and Retail conference, Macy Inc.’s EVP and CFO, Adrian Mitchell said their off-mall specialty brick-and-mortar strategy of smaller, local stores will contribute “a material level of volume over time. The data seems to show that those off-mall locations that are very convenient to where customers live, shop and work are actually quite relevant and an important part of how we think about our strategy. We very much believe that Market by Macy’s, serving our Macy’s brand, and our Bloomie’s small-store format serving our Bloomingdale’s brand, are critical to the growth of our stores’ channels, and critical to the growth of our omnichannel business.”

Michelle Gass said, “We are evolving our position from a department store to a more focused lifestyle concept, centered around the active and casual lifestyle. This is unique and we can own this space. Make no mistake, this is a transformation, it is a complete reinvention of our business model and our brand.”

Mitchell continued, Market by Macy’s is seeing “sales beyond our expectations … so getting that location right is really important, and we’re seeing those convenient high-traffic locations really produce. It’s a fundamentally different experience but a relevant experience. I’m really excited that the number of new customers shopping these stores is materially higher than mall-based stores.”

Check those boxes on localization and personalization! Mitchell pointed out that doing business at a very local level has customer experience scores meaningfully higher than Macy’s mall-based stores and provides easier navigation, quick and easy checkouts, and more sales associates to assist and interact with customers.

Bloomingdale’s small-store Bloomie’s strategy was launched in Alexandria, VA, offering contemporary and luxury brands, services, tech-enabled stylists, new store design concepts and a restaurant. While the rollout strategy was not outlined by Mitchell, I have to assume that if the Alexandria location is successful, a similar expansion strategy will be put in place.

While Macy’s stated in 2019 that they would close 125 stores between 2020 and 2022, only about half have been closed. Jeff Gennette, Chairman and CEO of Macy’s said, “We have delayed most of the remaining closures we earmarked in 2019 in order to maintain a physical presence in many markets while we scale up our off-mall format stores. In addition to being a place for discovery and shopping, our stores are now also fulfillment hubs supporting our digital operations through buy-online, pick-up in store, curbside pick-up and same-day delivery. Keeping these cash-positive stores open also helps to fund the investments we are making to reposition our fleet over the next several years.”

Macy’s and Bloomingdale’s are also developing online marketplaces which will greatly expand the number of products, brands, categories and all in greater depth. Mitchell said, “Digital sales per capital in markets where we have stores, even mall-based stores are three times more productive than markets that don’t have it. So, the notion of winning in omnichannel is also recognizing the critical importance of stores.” And in another nod to their off-mall strategy, he said, “We feel that we have to place our stores in more convenient locations. I will say very clearly that repositioning and optimizing the physical footprint is a must-win initiative for Macy’s to be relevant over the next 10 years.”

Kohl’s

Just as Kohl’s pioneered an off-mall, small-store distribution strategy opening stores in neighborhoods and shopping centers during the 90s, capturing young working moms who did not have the time to drive to and shop through the malls, they are once again envisioning a new fleet of smaller neighborhood stores (35,000 vs. their current 80,000-square-feet stores). They plan to roll out 100 over the next four years, following the launch of its first prototype in Seattle this fall. CEO Michelle Gass told WWD the small stores have “a level of flexibility and hyper localization.” For example, in Seattle there would be an intensified assortment of outerwear that’s localized and tailored to the local climate and customer base. Kohl’s has invested in a new platform to use data science for more granular merchandising decisions on a local store level. As a part of Kohl’s repositioning, they are also investing in modernizing and refreshing the store layout to elevate the shopping experience.

About Sephora’s beauty shops, currently in 200 Kohl’s doors, Gass said it’s “a game changer,” generating $2.2 to $2.4 million in sales per Kohl’s store. Executives also said that 25 percent of those shopping Sephora are new Kohl’s, and many decide to shop other categories while in the store. Kohl’s plans another 400 Sephora shops by the end of 2022 and 850 by the end of 2023, projected to generate $2 billion in sales.

Gass said the Amazon shops (now in all of Kohl’s roughly 1200 stores) generate “millions of new customers” who are primarily returning Amazon purchased goods (an estimated 2 million returns in 2020) however, while in store, many are shopping and purchasing other goods.

And to change Kohl’s culture mindset, Kohl’s is eschewing the department store moniker. Gass said, “We are evolving our position from a department store to a more focused lifestyle concept, centered around the active and casual lifestyle. This is unique and we can own this space. Make no mistake, this is a transformation, it is a complete reinvention of our business model and our brand.”

Don’t Follow the Numbers

I’m exaggerating about ignoring the numbers to make a point. There are a multitude of sources that have covered the numbers and speculation of what they mean, and as I said, this article is about the strategy. There is also a media obsession about the activists who foolishly create a narrative of how they can “unlock value” in the short term … AKA making a lot of money fast.

I say pay attention to the strategy. Because if the strategy and its execution are right, the money will follow. Just look at Target. Macy’s and Kohl’s, with similar strategies, are slightly behind Target in their execution, some of the lag due to their nonessential classification during the pandemic.

I say give them a break. However, I must emphasize that “execution” is the operative word. I once lauded Ron Johnson for his transformative vision for JC Penney (which I still do). However, his extremely poor execution crippled the brand, which to this day is still struggling to stabilize out of bankruptcy.

A former CEO, Allen Questrom, took the helm of a limping JC Penney in the early 2000s and famously and figuratively told Wall Street “don’t follow the numbers.” Between the lines, he told the financial world and shareholders not to expect a profit for about five years. He went on to successfully execute a strategy that did right JCP’s sinking ship.

Likewise, I witnessed CEO Brian Cornell telling analysts that he was committing to a capital investment of some $8 billion over about five years to essentially turn Target’s business around. And right there in real time, during the meeting, I watched their stock price on Yahoo drop like a rock as he advised that the bottom line was going to be squeezed. He not only turned it around, but he also recently was awarded the NRF Retailer of the Year.

To Macy’s and Kohl’s: Stay focused on the long-term, listen to your customers and fine-tune the strategy as needed, and execute, execute, execute. Any retailer can have a good idea, but pulling it off is what defines the greats.

Last fall, investment fund Jana Partners launched an activist campaign at Macy’s. The fund aimed to double Macy’s share price by separating the department store’s growing ecommerce business from its physical stores. Jana Partners portfolio manager Scott Ostfeld estimated that Macy’s digital operations could be worth $16.8 billion: far more than the entire company’s market value at the time.

Macy’s management took this suggestion seriously. Rather than rebuffing Jana Partners, CEO Jeff Gennette told investors in November that Macy’s had hired AlixPartners to evaluate a potential ecommerce spinoff.

Macy’s recognized that separating its stores from its digital operations made no strategic sense. But the board and management felt that if the market were willing to pay enough for the ecommerce business, they had to consider doing so anyway.

However, within months of launching its activist campaign, Jana Partners exited most (if not all) of its investment in Macy’s. And to nobody’s surprise, the company abandoned the ecommerce spinoff concept soon thereafter.

A Serious Threat

Jana Partners’ rationale for advocating an ecommerce split was that Saks Fifth Avenue separated its stores from its ecommerce operations in early 2021 and received a minority investment at a $2 billion valuation for the ecommerce unit. That equated to a heady valuation of roughly two times sales. The fund argued that Macy’s ecommerce unit could fetch a similarly high valuation if it were spun off.

There were many reasons to doubt the soundness of this plan. For one thing, while Saks got a big windfall up front, it remains to be seen whether a web of service agreements between Saks Fifth Avenue stores and the new ecommerce unit can replicate a seamless omnichannel experience.

Additionally, Macy’s has many more stores and far more omnichannel integration than Saks. That would make separating the stores from the digital business even more complicated and perilous. The ability to browse in stores and buy online (or vice versa), pick up ecommerce orders at a nearby store, make returns or exchanges in stores, etc. is a key competitive advantage for Macy’s vis-à-vis pure ecommerce retailers.

Macy’s board and management were well aware of these issues, as well as the advantages of an integrated omnichannel model. As Gennette said during Macy’s Q3 earnings call, “This past year, we conducted an analysis of our ecommerce and brick-and-mortar operations evaluating how each contribute to the value of the Company as well as how each benefits from being integrated and working together. … This work supported our digitally led omnichannel Polaris strategy that we are successfully executing.”

So why didn’t Macy’s immediately shoot down Jana Partners’ proposal? It came down to one word: money. Genette continued: “That said, we also recognize the significant value the market is assigning to pure e-commerce businesses.”

In short, Macy’s recognized that separating its stores from its digital operations made no strategic sense. But the board and management felt that if the market were willing to pay enough for the ecommerce business, they had to consider doing so anyway.

Jana Partners Goes Away

In a February securities filing, Jana Partners revealed that it slashed its Macy’s stake by nearly 84 percent during the last three months of 2021. This suggests that within a month or two of publicly disclosing its investment in Macy’s (and its proposed strategy), the fund was already dumping shares. By the end of January, Jana Partners reportedly exited the investment entirely.

Why the abrupt reversal? First, Macy’s stock surged last fall. In early October, when Jana Partners first made its case for an ecommerce spinoff, the shares traded for around $22. But Macy’s stock surpassed $30 in early November and remained there for most of the month, peaking at a multiyear high of $37.95 the day of Macy’s strong Q3 earnings report (which was also when the company announced the strategic review with AlixPartners).

Even in the $30s, Macy’s shares traded for less than what Jana Partners claimed they would be worth if the company spun off its ecommerce business. But as the saying goes, a bird in the hand is worth two in the bush. The fund booked a quick profit and moved on.

A second reason why Jana Partners may have backed down is that its thesis that an ecommerce spinoff would be highly valued began to fall apart. Pure-play ecommerce companies’ valuations retreated in late 2021 due to slowing growth and rising interest rates. For example, shares of Wayfair and Chewy (two prominent ecommerce firms) each fell by more than 20 percent between the beginning of November and year-end.

Put simply, the lower the valuation a Macy’s ecommerce spinoff would receive, the less rationale there would be for attempting such a complicated maneuver.

Macy’s Sticks to Omnichannel

In its recent Q4 earnings report, Macy’s announced that it will double down on its omnichannel strategy rather than attempting to spin off its ecommerce operations. The company explained:

Ultimately, based on the work completed, the Board determined that an integrated, omnichannel Macy’s, Inc. with an acceleration of certain Polaris initiatives, will deliver greater value to our shareholders than a separation of digital and physical assets at either the enterprise or brand levels. Key to the Board’s decision-making were the high separation costs and ongoing costs from operating separated businesses, as well as high execution risk for the business and the company’s customers. As a result of the review, the company is accelerating Polaris initiatives that span digital, brand partners, private label, marketing and loyalty and the expansion of off-mall, small-format Market by Macy’s and Bloomie’s stores.

Even with the pressure from Jana Partners, it was unlikely that Macy’s would have separated its stores from its website when push came to shove. Once Jana Partners was out of the picture, it was a foregone conclusion that Macy’s would stick to its omnichannel strategy. After all, there’s no objective business rationale for operating the brick-and-mortar and digital channels as separate units.

Making the decision even easier, ecommerce valuations have continued to plummet. Wayfair and Chewy shares have each lost more than a third of their value this year, leaving them about 65 percent below the highs set in early 2021. Thus, even if Macy’s were to create an ecommerce spinoff, it wouldn’t be worth nearly as much as some investors had assumed last fall.

What Does It Mean for Kohl’s?

While Macy’s has survived its activist pressure with no ill effects, rival department store chain Kohl’s still faces a big fight with activist investor Macellum Advisors. Macellum has nominated a new slate of directors to replace Kohl’s current board. The fund wants to boost Kohl’s stock price by any means necessary: selling the company, spinning off its ecommerce business, cutting capital expenditures to boost free cash flow, and/or using sale-leasebacks of Kohl’s real estate to raise cash to fund bigger share buybacks.

Earlier this month, Kohl’s reported that adjusted earnings per share reached a record $7.33 in fiscal 2021. That eclipsed the previous high by 31 percent. Nevertheless, Kohl’s stock has actually declined over the past 12 months. As a result, Macellum Advisors hasn’t had a particularly good exit opportunity (unlike Jana Partners), so the fund is ramping up its pressure on the retailer.

Macellum CEO Jonathan Duskin indicated after Kohl’s recent investor day that he thinks the company should sell itself. The retailer has reportedly received (and rejected) offers in the $64-$65 per share range. That’s well below what Duskin has previously said Kohl’s is worth, but like Jana Partners, it appears that Macellum would gladly give up a lot of upside potential to lock in a profit.

Selling Kohl’s to a private equity firm would be almost as bad for business as Macy’s spinning off its ecommerce operations. A private equity buyer would likely sell and lease back most of Kohl’s real estate to help finance the deal and slash capital spending and other expenses to free up cash to repay other deal-related debt. Moves like these could jeopardize Kohl’s long-term competitiveness, particularly if they impacted the company’s new partnership with Sephora.

Despite these risks, Macellum Advisors’ board slate could gain support from other major Kohl’s shareholders. Kohl’s stock has been stagnant for two decades, which means there are surely plenty of disgruntled investors hoping for a big shakeup.

This highlights the importance of telling Wall Street a good story. Kohl’s is posting record profits per share, yet its stock has struggled, making it vulnerable to an activist attack that could hurt it badly in the long run. Macy’s recent fundamental performance hasn’t been much better, but the stock’s rally in late 2021 helped it shake off its activist threat. That will allow management to focus on maximizing the company’s long-term potential in the years ahead.