By Melissa Fares and Aishwarya Venugopal
(Reuters) – Macy’s Inc said on Wednesday the recent tariffs on Chinese imports by Washington is hitting the department store operator’s furniture business and executives cautioned that additional trade levies would leave its clothing and accessory categories vulnerable.
“If the potential fourth tranche of tariffs is placed on all Chinese imports, that will have an impact on both our private and our national brands,” Chief Executive Jeff Gennette told investors on an earnings call, adding that the company would do what it could to minimize the effect on customers.
Gennette said any escalation of tit-for-tat tariffs was not factored into the company’s annual outlook.
The executive said the company had strategies in place to offset the tariff impact on Macy’s furniture business and that the company has been “working hard … for a number of months and really for a couple of years” about moving production out of China, as it sources a majority of its merchandise from manufacturers located outside the United States, primarily in Asia.
Washington dramatically escalated its 10-month trade war with Beijing on Friday by raising levies on $200 billion of Chinese goods in the midst of trade talks, and U.S. President Donald Trump has threatened new tariffs on all remaining U.S. imports from China, sending global financial markets into a tailspin. China retaliated on Monday, though on a smaller scale.
Q1 RESULTS TOP EXPECTATIONS
Macy’s topped Wall Street estimates for quarterly same-store sales and profit benefiting from increased online sales and higher demand for items sold at its off-price stores.
Macy’s shares, which have so far lost more than a quarter of their value this year, were up about 1% at $22.04 in morning trading.
Like its peers, the Cincinnati, Ohio-based department store chain, which has closed more than 100 stores since 2015 and cut thousands of jobs as mall traffic plummeted, faltered in the past few years as it struggled to adjust to a fiercely competitive retail landscape where shoppers buy more goods online at places like Amazon.com Inc.
The 160-year-old retailer has poured money into building up its private label clothing as well as expand its off-price venture, Backstage, by adding 45 more stores this year.
The company in February said it would also invest in categories where Macy’s has a strong market position such as dresses, jewelry, women’s shoes and beauty products.
Gennette said brick-and-mortar sales trend improved sequentially in the first quarter, helped by its off-price Backstage business. The retailer said it saw double-digit growth in its digital business and that mobile continues to be Macy’s fastest-growing channel for sales growth.
Sales at Macy’s stores open more than 12 months, including sales in department stores licensed to third parties, rose for the sixth straight quarter. They were up 0.7%, above the average analyst estimate of a 0.3% rise, according to research firm Consensus Metrix.
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Gross margin in the quarter fell to 38.2% from 39%, while spring inventories were heavier as a delayed start to the season led shoppers to spend more on discounted winter apparel. The company said it expects to see some gross margin pressure in the second quarter as it continues to clear excess spring products.
Last quarter, Macy’s announced a plan focused on cost cuts for 2019 to speed up decision-making and result in an annual savings of $100 million.
The company earned $136 million, or 44 cents per share, in the first quarter ended May 4, compared to $139 million, or 45 cents per share, a year ago. That exceeded the average analyst estimate of 33 cents.
Net sales fell to $5.50 billion, roughly in line with analysts expectations, according to IBES data from Refinitiv.
“With comp results coming in better-than-feared, we’d expect a modest relief rally out of Macy’s today, but would not be chasing the stock,” Gordon Haskett analyst Chuck Grom said in a note.
The company also repeated its previously issued financial forecast for the year.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="(For a graphic on 'Macy's Same-Store Sales Performance' click https://tmsnrt.rs/2E56QPJ)” data-reactid=”47″>(For a graphic on ‘Macy’s Same-Store Sales Performance’ click https://tmsnrt.rs/2E56QPJ)
(Reporting by Melissa Fares in New York and Aishwarya Venugopal in Bengaluru; Editing by Arun Koyyur and Nick Zieminski)