Friday 28 July 2017

Share watch: Famous names like Macy's suffering in US retail wars

Macy’s is one of the world’s largest fashion goods retailers operating department stores and is valued at $9bn (€8.4bn). Photo: PA
Macy’s is one of the world’s largest fashion goods retailers operating department stores and is valued at $9bn (€8.4bn). Photo: PA

John Lynch

Names like Macy's and Bloomingdale were, and still are, icons in American retailing. For as long as anyone can remember, these stores have inspired dedicated shoppers with the glorious expectation of a good rummage through the racks.

But the world is changing and even shopping is no longer what it was. Last month Credit Suisse downgraded the US retail sector stating the "market is saturated with too much retail space occupied by stores selling apparel", a shocking blow to what on this side of the pond is called the High Street.

The internet is to blame, of course. Online shopping, especially favoured by the younger customers, is growing at a rate five times that of overall retail. It is a particular difficulty in the Unites States where there is six times more retail space per capita than in Europe or Japan. The US retail landscape has changed and is a disconnected environment.

This is going to hit US shopping malls particularly badly. These malls have prominent department stores as anchor tenants and if the stores have to retrench, the malls are likely to feature large boarded-up premises. This is unlikely to happen in wealthy areas but where dollars are harder to come by, it is entirely possible that bricked-up store fronts in shopping centres could be a new problem for President Trump. The man who campaigned to revitalise US manufacturing will probably not have foreseen the sight of distressed shopping malls, particularly in the locations where he generated his votes.

Macy is not the only sufferer. Sears, (including Kmart) announced it was in "a difficult position" despite having offloaded 2,400 stores in the last decade. Rival businesses are faring little better. Abercrombie & Fitch plans to reduce its stores by 60, JC Penny by 145 and Macy's Inc is cutting its store numbers by 65.

Macy's is one of the world's largest fashion goods retailers operating department stores and is valued at $9bn (€8.4bn).

It is also one of the major shopping mall retailers in the USA. Last year it had 830 stores in operation in 45 states, while employing 140,000 people.

Most of its stores are located in urban or suburban locations mainly in malls in densely populated areas, an advantage over some of its rivals.

The group sells a wide range of merchandise including apparel, accessories for men, women and children. It also markets cosmetics, home furnishings and other consumer goods. Ladies apparel, accessories and cosmetics account for almost two thirds of group sales. The company also sells a number of private-label brands like Martha Stewart, Greg Norman, Material Girl and Karen Scott. Over the last five years, the company has closed a total of 40 stores but, as mentioned earlier, it anticipates that store closures will accelerate. In addition it is shifting its resources away from bricks and mortar to their own online operations.

The group goes way back which makes the latest downturn a particular challenge. It was founded in 1858 and within a decade had developed into the department store concept which has held it in good stead down the years. A pointer to the new retail regime came a couple of years ago when, in the face of sectoral underperformance, the group acquired Blue Mercury, a luxury beauty product and spa retailer with outlets in upmarket neighbourhoods.

Macy's revenue last year was $26bn, down a significant $1.3bn.

Net income was also disappointing, plunging by half to $620m, in spite of a cost-reduction programme.

As might be expected in a batten-down-the-hatches approach, capital expenditure has been reduced.

Macy's shares have moved from a peak of $72 in mid-2015. They trade today at $29 with a modest price-earnings multiple of 9 and a dividend yield of 5pc.

Investors who bought at the peak have taken a beating.

The company is keeping some of its investors mollified, spending $7bn on a share-buyback programme over the last four years, and increasing its dividend.

However, US retail is an unhappy scene and probably Macy's shares should be avoided.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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