Remarks by Terry J. Lundgren,
Chairman, President and Chief Executive Officer,
Macy’s, Inc.
To the Annual Meeting of Stockholders
May 16, 2008
There has been a lot of talk about how difficult the economic environment has been for retailers over the past year. There is a lot of truth in what’s being said. And it is reflected in share prices that have declined significantly since last spring in the retail sector as well as the S&P 500.
At Macy’s, Inc., our financial performance has not been what I would like it to be. But we in fact have outperformed most of our large competitors in terms of same-store sales in each of the two most recent quarters.
For the first quarter of 2008, same-store sales at the six publicly traded department store retailers most often compared to us averaged more than 7% down. Our same-store sales at Macy’s, Inc. were down by 2.6%. That’s not positive by any measure, but it does show that we are competing successfully in this difficult economy and that, in fact, we are gaining market share.
Clearly, consumers are affected by high gas and heating oil prices … declining home values … lack of job growth … and the constant headlines with bad economic news.
In this environment, we are running our business prudently at Macy’s, Inc. Be assured we are managing expenses diligently, spending capital dollars wisely and keeping our balance sheet healthy. In particular, we are keeping tight controls on our inventory levels.
But that said, this is not the time to retrench in our approach to the customer. This is the time to embrace change … to innovate … and for us as fashion retailers to remain fresh and relevant to a customer who is looking for exciting and interesting merchandise, as well as value.
This is how we will meet our financial goals, including maintaining our investment-grade rating and returning our earnings before interest, taxes, depreciation and amortization – or EBITDA – to the historic high rate of 14 to 15 percent of sales.
Customers have not stopped shopping, but they are more discerning in what they buy. Our objective is to be so compelling that customers spend more of what they have to spend at Macy’s and Bloomingdale’s. This includes our macys.com and bloomingdales.com online sites, which have grown dramatically over the past three years and in which we are investing for continued growth.
As we look for ongoing improvement in our bricks-and-mortar stores, we have undertaken a broad-ranging and very exciting initiative we call “My Macy’s.” Our objective here is to offer a tailored and localized merchandise assortment and shopping experience in every single Macy’s store across the country.
We want every customer to walk into a local Macy’s store and say, “This store has exactly what I want and need. You get me. This is my Macy’s.” The sizes, tastes and preferences of customers can be different from neighborhood to neighborhood – and in regions across the country. Therefore, we need to adjust the products and experiences in every store within the context of this powerful nationwide brand called Macy’s.
No large national retailer has ever seriously undertaken this kind of localized approach in the past. For us, it evolved from intensive research among customers, vendors, all of our store managers and key industry observers as we studied how we can improve sales and grow profit in every Macy’s location.
Our current area of focus within the My Macy’s approach is a new localization model now being implemented in the geographies of the former Macy’s North, Macy’s Midwest and Macy’s Northwest divisions – a broad stretch of 20 districts stretching from Seattle to Scranton, Pennsylvania, and including more than 230 stores.
In these local markets, we are adding more resources – more eyes, ears, brains and hands – into the stores. And we are empowering local managements to make more decisions that are right for their local customers.
The new localized organizations just took effect two weeks ago, so we’re very early in the process. But we do expect this model will be adopted elsewhere in the company over time as we fully implement the new structure in these 20 districts … learn from the experience … and adopt best practices.
This new My Macy’s localization model represents the biggest change in our operating structure in many years. We believe it will fundamentally change the way we do business. Our expectation is that results will begin to show in spring 2009, although we also look forward to seeing some improvement in our store execution in the fourth quarter of this year.
I’d also like to point to two other subjects that are top-of-mind at Macy’s, Inc. and that are very high priorities for me personally as we work through the current soft economy and position our company for success over the longer term.
First is our ongoing quest for distinctive and exclusive merchandise assortments.
At previous annual meetings, we have emphasized that customers come to Macy’s and Bloomingdale’s looking for new and interesting merchandise. They don’t want to see the same goods in our stores as they do all over town.
As a fashion retailer, we set the bar higher for ourselves. We want merchandise that is fresh, exciting, fashionable and interesting for the customer. We want customers coming into our stores to have a sense of discovery. We want and need to have the best and most relevant brands for the lifestyles our customers choose to live.
In 2007, more than 35 percent of all merchandise sold at Macy’s was either private brand or in brands that are exclusive to us or in very limited distribution. We expect that percentage will continue to grow as we respond to the needs of customers across the country.
Here in the room today, we have displays representing just a few examples of exclusive brands of merchandise sold at Macy’s.
Martha Stewart collection, which debuted in fall 2007, has been a big hit with our customers and has driven new customer traffic to our Home Store.
Donald Trump menswear is among our best sellers in categories such as dress shirts, ties and accessories.
I should note that the Martha Stewart and Donald Trump businesses at Macy’s have been supported by their appearances in the Macy’s national television advertising that features the faces behind many of the great brands sold in our stores. The ads have been listed among the favorite and most remembered TV commercials on the air.
We also have some items from Lush Cosmetics, a fresh and unique maker of soaps, cosmetics and bath products that is rolling out exclusive departments within selected Macy’s stores across the country. Lush launched at Macy’s last fall, and the business has been very strong. By this October, we will have Lush departments in 44 stores, and the number is expected to grow to 100 in 2009.
This fall, Macy’s will be the exclusive department store retailer of Tommy Hilfiger apparel. This has been a very good business for us, and going forward the customer will find Hilfiger’s distinctive designs of men’s and women’s sportswear only in Tommy’s own stores and at Macy’s.
This is a much bigger deal than any newspaper has reported. This business is large and just outstanding.
Today, we announced another exciting new partnership. We have signed an agreement for FAO Schwarz toy departments to open in up to 275 Macy’s stores this fall. And we expect to expand the program over the next two years to include the 685 Macy’s stores where we have children’s departments.
Everyone loves the very creative toys offered by FAO Schwarz. And aside from two of FAO’s own stores and website, they will be found exclusively at Macy’s. We have been testing an FAO Schwarz store-within-a-store at Macy’s on State Street in Chicago over the past two seasons, and the results have been impressive.
This is an exciting and unique way to bring the toy category back into Macy’s in a significant way. We expect it to drive new customers into our stores, and to insert a new level of fun onto the children’s selling floor.
Ed Schmults, the CEO of FAO Schwarz, is here with us this morning. Ed, please stand. I hope everyone gets a chance to meet Ed. His excitement about the toy business is infectious. We’re really looking forward to the arrival of FAO Schwarz at Macy’s this fall.
Big initiatives like Martha, Tommy, Donald and FAO Schwarz could not have happened if we were not the national, fashion department store that Macy’s is today.
My second key subject involves the continued development of our people. Talent is a topic I have addressed at every annual meeting in my tenure. It is an indication of how important this subject is to me.
No company, especially in a dynamic and fast-paced business like retailing, can prosper without having the right people in every position. That requires us to recruit, retain and develop the very best talent.
This is important at every level of the organization. Our company is known for the long tenure of many executives and associates. And we are widely regarded as having the best people in retailing.
I’d like to focus this morning on our engagement of new talent coming into the workplace because it is our intention to keep that reputation alive.
I personally spend as much time as I am able on college campuses around America. And every month, I meet with small groups of high-potential individuals who are beginning their career paths at Macy’s and Bloomingdale’s.
We are investing time and money with these future leaders and it is beginning to pay off.
Recently, I asked a group of new hires to talk about what attracted them to retailing and to Macy’s.
Let’s listen to what they have to say.
(Insert video Here)
I am very proud of our work in attracting and developing talented individuals like the ones you just saw in the video.
You might know that Macy’s, Inc. is listed by BusinessWeek as among the “Best Places to Launch a Career.” There were only three retail companies on that list for 2007, and we are ranked the highest among them.
But we as a company – and retail as an industry – need to do better. We need to continue to emphasize that retailing is an inclusive industry that offers opportunity, excitement and fulfillment for a diverse range of individuals who aspire to achieve success.
Macy’s, Inc. has been recognized for training and development through programs such as our corporate Leadership Institute here in Cincinnati. And we continue to enhance education opportunities for our employees in every division.
We have great people at Macy’s, Inc. They work hard and are dedicated to driving results for our shareholders. The Board of Directors and I thank each and every one of our employees for their dedication, spirit and energy. This includes many people in this room today.
The economy isn’t very strong right now. But it will rebound. And when it does, Macy’s is well-positioned for the future.
We are sharpening our local focus through My Macy’s…
We have an outstanding and distinctive merchandise assortment that is becoming better every season…
We are beginning to study the prospects for potential international expansion in the years ahead…
And all of this is made possible by having the best people in our business.
Thank you for coming today, and for your attention.
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