Macy’s cuts jobs! Rocks Markets!

In the news today, Macy’s one of America’s flagship department stores announced that they would be laying off 7,000 people which is roughly 4% of its workforce.  The company said it would not raise salaries for executives in spring 2009 and will also cut the amount of matching 401(k) contributions in the year. It will recommend to the board to reduce other benefits for executives including company cars, life insurance and merchandise discounts.

 

This was big news to the market today which is big news in itself.  Remember that the market has become accustomed to and largely numb to bad news.  It shouldn’t have been any surprise that forth quarter numbers would disappoint nor should have it been shocking that Macy’s executives believe that their earnings would be down 6% to 8% this year.  In short, nothing that Macy’s reported should have come as a surprise after such an awful holiday season but it did.  Why was a market which was heading for positive territory turn again towards the negative on this news?

 

First, it comes largely from the market’s belief that the retail model is in danger.  Many investors believe that the shopping mall is in very serious danger due to the discretionary nature of it.  Malls are often full discretionary stores and as we know, consumers don’t frequent stores selling discretionary items during a recession.  When money is tight, we replace Abercrombie with Dollar Tree.  Instead of buying a Coach handbag, we clip our coupons and head to Wal Mart.  The large overhead costs of the shopping mall combined with the lower customer base has many malls in serious trouble. 

 

Next, Macy’s, and stores like it, are being seen by many as being an outdated business model.  While a store with something for everybody works well for high volume consumer staples, it doesn’t work quite as well for luxury items.  Inventory at stores like Macy’s doesn’t move as fast so stores have to hold on to inventory for much longer creating liquidity issues.  Combine that with a common view that these stores are not for the value shopper and we see another reason why stores like Macy’s are facing an uphill battle.

 

This news was a small amount of proof that some people’s fears are coming true and they reacted.  This was news that was expected, but not welcome.  The other problem is that we know that stocks in the same industry move together.  The news of Macy’s caused related stores to be negatively affected.

 

We can be sure that Macy’s is going to be watched closely to see if this is only the beginning of a lot of bad news not only for Macy’s but also the department store model.

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