Coverage: Macy’s posts another disappointing quarter

It was another rough quarter for Macy’s and shares plunged 14 percent as a result, but the store known for its Thanksgiving Day parade and star logo might not be done yet.

Nandita Bose and Sruthi Ramakrishnan of Reuters detailed the overall problems of the retail industry:

Warm weather, low spending by tourists and a pileup of unsold inventory prompted Macy’s Inc to cut its full-year forecast on Wednesday, raising wide concerns about the retail sector’s financial health.

Macy’s in a quarterly report also said it would not create a real estate investment trust for its stores, disappointing some investors and helping to push down shares 14 percent for the day.

The long spell of warm weather in September and October, which hurt sales of cold weather apparel like coats and jackets, could also affect retailers like Urban Outfitters Inc, while a drop in spending by tourists is likely to impact Tiffany & Co and Hudson’s Bay Co, which runs chains like Saks Fifth Avenue, said Oliver Chen, analyst with Cowen Equity Research.

Analysts also expect slowing sales of accessories like handbags, shoes and cosmetics to hurt brands including Fossil Group and Michael Kors Holdings Ltd.

Urban Outfitters shares ended down 7.4 percent, Tiffany & Co closed 3.37 percent lower and Michael Kors and Fossil both fell over 4 percent.

Macy’s Chief Executive Terry Lundgren said on a conference call he was not happy with the company’s performance in the quarter ended Oct. 31.

Sales at stores open at least a year fell 3.6 percent in their third straight quarterly decline. Analysts on average had expected 0.2 percent growth, according to research firm Consensus Metrix.

Macy’s said it expected same-store sales to fall by 1.8 percent to 2.2 percent for the year ending in January.

The company cut its full-year profit forecast to $4.20 to $4.30 per share, excluding special items, from a prior range of $4.70 to $4.80.

Phil Wahba of Fortune spoke with the company’s CEO about how e-commerce is changing the industry:

Macy’s has hit its roughest patch since the Clutch Plague, prompting the retailer to add to its program of store closings as sales continue to fall.

While the department store chain, which on Wednesday reported its third straight quarter of declining comparable sales, plans to streamline its fleet and weed out dozens of poor locations, there is a limit to how much the retailer will ultimately cut, its CEO Terry Lundgren says.

Even in the age of e-commerce, indeed because of how customers are shopping in the digital sales era, he argues, stores are as valuable as ever.

“I very strongly believe that consumers are not only going to shop online, they’re going to start their journey on their phones, they’re going to enter our stores, they’re going to interact with our sales associates, learn more about product, try product on, feel the fabric,” Lundgren told Fortune. “They may not buy it in store that day. But without that store interaction, it’s likely the sale would not occur.”

Macy’s has spent billions in recent years integrating its e-commerce and its physical stores to enable so called “omni-channel” shopping, something that has given it a big head start on the likes of Kohl’s and J.C. Penney. Data recently compiled for Fortune by eMarketer found Macy’s to be the No. 4 Internet retailer in the United States with sales of $4.7 billion in the last 12 months, or 17% of sales, one of the highest rates among bricks-and-mortar retailers.

Brian Sozzi of TheStreet explained the three reasons not to count Macy’s out yet, including stores closures to boost profits, additional real estate deals and the company’s entrance into the off-priced sector:

As previously announced in September, in early 2016 Macy’s will close 35 to 40 under-performing stores out of its current portfolio of about 800 Macy’s and Bloomingdale’s locations.

On Wednesday, Macy’s suggested it’s not yet done shuttering stores in order to more profitably run the business in the age of digital commerce, saying in a statement that it “expects it will continue to reduce the number of stores over time.” Lundgren was non-committal when asked about the optimal size of Macy’s store network in the the future.

“I don’t have an exact number, but it’s less than today,” said Lundgren, adding the rise of digital shopping makes it less essential for Macy’s to operate stores so close to one another.

According to Lundgren, it’s now important to get more productivity from Macy’s top locations, as opposed to operating a wide network of stores. One way Macy’s plans to focus on getting people into its stores, says Lundgren, is by opening more shops that offer unique merchandise or some form of service.

An example is the deal Macy’s announced Wednesday with Luxottica to open 500 LensCrafters optical shops inside the department store retailer’s stores. The first LensCrafters will open at a Macy’s location by April 2016, with 100 scheduled to open by the end of the year.

In recent years, Macy’s has also added shops from shoe retailer Finish Line (FINL) and toy retailer Build-A-Bear. In September, Macy’s struck a deal with electronics retailer Best Buy to operate shops inside its stores.

With fewer under-performing stores in the mix, and more productivity at the best locations, Macy’s profits could receive a nice boost once sales recover.

Suzanne Kapner of The Wall Street Journal explained the company’s bet on off-priced stores to save its business:

The new business, called Macy’s Backstage, is meant to compete with T.J. Maxx, Marshalls and other off-price chains. It could potentially address the overflow of goods on Macy’s floors while helping to bring in coveted new customers who don’t relate to old-line department stores.

Some analysts say it will be hard for Macy’s to find equilibrium, even as it meanders into the competitive off-price business. “It feels like too little, too late,” says Joan Payson, a Barclays analyst.

Other department-store chains, after all, have long embraced the outlet concept. First there was Nordstrom Rack, followed by Neiman Marcus Group’s Last Call. Saks now has 90 Saks Off 5th locations—no-frills stores that sell name brand goods at deep discounts.

Mr. Lundgren and his lieutenants had thought about jumping into the fast-growing market back in 2009—but stalled.

“Macy’s didn’t need a new concept at that time,” recalls Peter Sachse, the retailer’s chief for innovation and business development, who presented the off-price idea at a 2009 board meeting. “We had plenty on our plate,” he adds, noting the company was still digesting its merger of America’s biggest department store chains. Instead, it opened outlet stores for its smaller Bloomingdale’s unit.