Macy’s Sets Its Sights on China Amid Tough U.S. Climate

Macy’s Inc. is setting its sights on Chinese shoppers, with plans to test selling goods online in the world’s second-largest economy late this year.

The news came as the retailer reported a 26 percent drop in second-quarter profit and sales that came in short of Wall Street expectations. The company cut its annual sales forecast, and its shares tumbled 5 percent Wednesday.

As part of the joint venture with Hong Kong-based Fung Retailing Ltd., Macy’s will begin selling merchandise on Alibaba Group’s Tmall Global, which connects Chinese shoppers with overseas retailers. Macy’s offered few details about what it will sell in China but said it hasn’t ruled out opening stores there as well.

It’s the latest measure taken by Macy’s to pump up sales in a tough retail environment and changing consumer preferences in the U.S.

Macy’s has been a stellar performer among department stores during the recovery from the recession. But in the past year or so, it has seen a slowdown.

The company has now missed Wall Street analysts’ earnings expectations for two straight quarters and in three of the last five. That comes after beating forecasts for six straight years from 2007 to 2013, according to Ken Perkins, president of Retail Metrics LLC, a retail research firm.

The results from Macy’s, the first major retailer to report its finances this quarter, raise further concerns about consumer spending. J.C. Penney, Kohl’s and Nordstrom will report their second-quarter results later this week.

Macy’s was hurt by some of the same factors that tripped it up earlier in the year. A strong U.S. dollar has curtailed tourist spending in key locations like New York and Los Angeles. A West Coast port labor dispute added to those problems. Macy’s said Wednesday that planned markdowns in many departments were delayed to keep store racks filled when expected new merchandise arrived late.

But like other retailers, Macy’s, which has headquarters in Cincinnati and New York, also faces long-term challenges. For one, its middle-class customers are not spending more in its stores despite an improving economy. They remain fixated on deals and they’re increasingly looking online. And the money they are spending is going elsewhere.

“The overall growth in the economy is modest at best, and we are seeing customers gravitating to restaurants, recreational services, health care and electronics, rather than to traditional general merchandise,” Chief Financial Officer Karen Hoguet told investors in a call Wednesday.

Macy’s says it’s still optimistic about the second half of the year following a number of recent initiatives. It bought Blue Mercury, a Washington, D.C., cosmetics and skin-care retailer, earlier this year, and is expanding its store footprint. It’s getting ready to open the first four outlet stores called Macy’s Backstage this fall in and around New York City. And this month, Macy’s is expanding same-day delivery for online shoppers to nine additional markets, for a total of 17.

Macy’s is hoping that by making the brand more accessible to China, the company will learn a few things about its domestic and international customers in the U.S.

“Millions of Chinese have come to know and love Macy’s when they live in the United States or travel to New York, San Francisco, Chicago and other American destinations,” said CEO Terry Lundgren. “By making Macy’s accessible in China, we have an opportunity to deepen our relationship with domestic and international customers and to grow sales.”

Other U.S. retailers on Tmall Global include Costco, Juicy Couture and Gap, according to Alibaba.

Still, the latest numbers illustrate the challenges before Macy’s.

Macy’s earned $217 million, or 64 cents per share, in the quarter ended Aug. 1. That compares with $292 million, or 80 cents per share, in the year-ago period.

Revenue fell 2.6 percent to $6.1 billion from $6.26 billion.

Analysts had expected 76 cents per share on sales of $6.22 billion, according to FactSet.

Macy’s now says that it expects annual sales to be down 1 percent, down from its original forecast of up 1 percent for the fiscal year. It also now forecasts revenue at stores opened at least a year to be flat, compared with previous guidance for a 2 percent growth.

It reiterated its annual profit guidance, largely because it will benefit from a sale of real estate in Brooklyn. Macy’s, which has been under pressure to spin off its real estate, estimates a $250 million gain from the sale.

On Thursday, Macy’s shares fell again, dropping $1.13, or 1.8 percent, to $62.98.