Monday , September 23 2019

What trade war means for Macy’s

Macy’s Inc.’s turnaround efforts didn’t backslide in the first quarter. The department store behemoth reported that comparable sales rose 0.6% from a year earlier in the first quarter, or 0.7% including licensed departments. That increase surpassed analysts’ expectations and set the retailer on track to easily achieve its full-year guidance of 0% to 1% growth on this measure.
Adjusted earnings per share of 44 cents also blew past analysts’ estimates. And while the company’s gross margin fell to 38.2% in the quarter from 39% a year ago, the company had previously warned this quarter would have particular gross-margin pressure, with improvement to come later in the year.
But allow me to follow that admittedly faint praise with a warning: If this is all Macy’s was able to deliver before a significant escalation of US-China trade tensions, just imagine how darkened the outlook could get if the standoff intensifies — both for Macy’s and its mall-based competitors — as the year goes on.
Macy’s, like other retailers, has been preparing for tariffs on a certain batch of goods to rise from 10 percent to 25 percent by taking steps such as reviewing sourcing alternatives. But President Donald Trump’s latest round of proposed levies likely caught much of the industry off guard. Indeed, Macy’s executives said that these most recent potential tariffs weren’t factored into its full-year guidance.
And it won’t be easy for any of them to immediately adapt. A coalition of industry trade groups says that 41% of the apparel imported to the US in 2017 came from China, as well as 72% of footwear and 84% of travel goods. This underscores how vital that nation is to the global supply chain of these products.
Even if Macy’s and its competitors are successful in revamping their sourcing relatively quickly, we must consider that tariff hikes are bound to shake consumer spending patterns in ways that are hard to fully anticipate. Shoppers, in some cases, might trade down from luxe products to more basic ones. They might even skip certain discretionary purchases, such as dinner at a restaurant or a cute new dress for their vacation. That, in particular, is a threat to Macy’s, whose apparel-heavy business could be starved of shoppers.
Last year was a bit of a Goldilocks moment for the retail industry. The economy was strong and some of the e-commerce investments they had initiated two to five years ago were really starting to pay off. New levies on billions worth of goods threaten to sap that momentum.
Macy’s can and should continue to work on the things it can control. At least in concept, its idea of focusing on gaining market share in so-called “destination businesses” like dresses and jewelry, seems worthwhile. And it needs to demonstrate more clearly how certain
elements of its turnaround plan won’t backfire.
—Bloomberg

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