Macy's (M 1.98%) stock fell to a 10-year low this week after the company released a disappointing second-quarter report. Its comparable-store sales decelerated to nearly flat levels, and its adjusted EPS plunged 60% on more markdowns.
Macy's full-year outlook for nearly flat comps growth and a 30% drop in earnings also indicated that it won't resolve its ongoing issues anytime soon. However, investors should still take a closer look at three ways Macy's is trying to fix its business.
Image source: Macy's.
1. A cloud partnership with Google
Macy's has been struggling to compete against Amazon and other e-tailers in recent years. Its digital sales rose by double-digits for the 40th straight quarter, but the unit still represents a tiny sliver of its overall sales.
Macy's Backstage off-price stores are faring better than its namesake stores, but they still represent a small percentage of its total stores. Meanwhile, Macy's inventories rose 1% annually during the quarter as a lot of unsold merchandise remained in its warehouses and stores.
To address these problems, Macy's recently partnered with Alphabet's (GOOG 0.46%) (GOOGL 0.42%) Google Cloud to improve the efficiency of its distribution centers. During the conference call, CEO Jeff Gennette stated that Macy's would boost the "efficiency, speed, [and] scale" of its new Backstage distribution center by using Google Cloud to handle the supply chain and optimize its online orders. Gennette said that Macy's would roll out Google Cloud to all of its other distribution centers next year.
Partnering with Google is a smart move, but it probably won't be a game-changer. Macy's rival Kohl's inked a similar deal with Google Cloud, but it hasn't moved the needle yet for that struggling retailer.
2. Jumping on the clothing subscription bandwagon
To challenge disruptive subscription-based rivals like Stitch Fix (SFIX 2.70%), Macy's introduced My List, a subscription rental service for Bloomingdale's higher-end apparel. Macy's will launch the service this November for $149 per month.
Instead of competing against Stitch Fix, which lets customers buy the clothing they keep, My List will compete directly against high-end rental services like Rent the Runway, which costs $159 per month for unlimited rentals. It's also much pricier than other apparel rental subscriptions like American Eagle Outfitters' (AEO 0.90%) Style Drop, which offers unlimited rentals (of three articles of clothing at a time) for $50 a month.
Image source: Macy's.
It's tough to say if My List will gain much momentum against these services -- it's arriving late to the party as Bloomingdale's loses its luster with shoppers. There's also the risk that My List could cannibalize sales of Bloomingdale's own apparel, which would exacerbate Macy's biggest challenges of weak comps growth and slipping margins.
Investors should also note that J.C. Penney (JCP +0.00%) discontinued its Bombfell big and tall subscription box service earlier this year, but that service was more similar to Stitch Fix than Rent the Runway.
3. Selling secondhand clothing
Macy's also recently launched a new pilot program with ThredUp, the world's biggest clothing resale marketplace, at 40 of Macy's stores. That mirrors a similar move at J.C. Penney, which also recently partnered with ThredUp to sell secondhand clothing at 30 stores.
Macy's and J.C. Penney are taking aim at off-price retailers by partnering with ThredUp, which is popular among Gen Z and millennial shoppers. However, ThredUp is an online marketplace, and we can't assume that discount shoppers will suddenly visit Macy's and J.C. Penney brick-and-mortar stores to try on their clothes.
Jonathan Trieber, CEO of offer-management platform CEO RevTrax, recently told Business Insider that the amount of revenue Macy's could generate from ThredUp would be a "pittance compared to the larger dollar problems." Business analysis company Owler estimates that ThredUp only generates about $37.9 million in annual revenue, a drop in the pond compared to Macy's estimated revenue of $24.9 billion this year.
ThredUp could also struggle to compete against off-price retailers for two simple reasons. Off-price retailers sell new clothes, and their selections are rotated quickly to lure shoppers back to brick-and-mortar stores. On the other hand, if ThredUp attracts more shoppers, it could cannibalize sales of Macy's new apparel.
The bottom line
Macy's is trying to turn itself around, but these efforts are uninspiring. Partnering with Google could help it cut some costs and streamline its warehouses, but it won't give its e-commerce business a significant boost or clear out its excess inventories.
Clothing rental and resale platforms represent interesting ways to reach new shoppers, but these initiatives probably won't meaningfully boost Macy's revenue. Therefore investors should take these efforts with a grain of salt and stay focused on Macy's ability to boost its comps, expand its margins, and reduce its inventories over the next few quarters.
