It’s clear that Macy’s (M – $18.29) management has mastered the “continuous restructuring shuffle” game.  Management consistently restructures operations and then promises operational improvement 1-2 years out, only to eventually announce another restructuring effort.  This superb PR gimmick has masked this management team’s bungled acquisition of ex-May and extended the tenure of the management team. 
 
The latest delay tactic (re: My Macy’s program per February 5th conference call):

“So, it really will be 2010, probably mid-year, before we start to see results of all of these changes and their impacts because, of course, if they are actually influencing inventory, from the first day that they are influencing the inventory it will typically take, on average, 6 months for that inventory to actually arrive in the stores.”      

Typically, we would suggest that we see material downside EPS risk.  But, M management seems to make up the “integration, divisional consolidation, and restructuring” cost numbers as they go and we’re sure they’ll similarly make the numbers ‘work’ in FY 2009. 
 
Recent M integration/restructure/consolidation spending history: 
* In FY 2005 – FY 2007, M spent $838 million on “integration costs” (excludes inventory valuation adjustments). 
* In FY 2008, M spent an additional $176 million on My Macy’s initiatives (Part I announced in January 2008 and Part II announced in February 2009).   
* In FY 2009, M is expected to spend $370 million on My Macy’s initiatives. 
 
Wow!  Despite closing unprofitable stores and shedding redundant operations, M has yet to deliver a hint of post-merger SG&A leverage.  The above excludes store/asset impairment or store closure costs. 
 
At some point, Mr. Lundgren will be held accountable for the company’s poor performance (miserable performance even in the go-go days 3+ years ago).  We’re simply surprised that it’s not happened to this point.    

During my days at GYMB in the late-1990s, the company launched a tween concept called Zutopia.  The concept was a failure from day #1 and was eventually sold to a foolish WTSLA in April 2001 prior to being shuttered in January 2004.

In its first year, the new chain was performing well below the company’s initial expectations.  The company had expected the chain to deliver in the neighborhood of $400/gross square foot in its first year.  Instead, it did $180.   

Certainly, Zutopia was destined for failure as there was little in the way of ‘true’ strategic planning and analysis prior to its launch.  Unfortunately, many times, retailers foolishly adopt a “build it and they will come” mentality when launching a new chain. 

This brings to mind Abercrombie & Fitch’s (ANF – $32.67) Gilly Hicks chain.  Look at the below chart.  Gilly’s trailing 12-month sales per gross square foot (SSF) in Q2 2009 totaled only $161.  By comparison, ANF’s struggling A&F and Hollister chains delivered trailing 12-month SSF totals of $425 and $401, respectively.  Gilly’s $161 SSF is even more alarming when considering the chain is largely located in Class A malls at this early stage of its development (‘average’ A&F and Hollister square footage would likely be considered Class B real estate). 

Not only is Gilly Hicks’ SSF performing at only 38% of A&F chain average, but its $161 SSF is even below the dismal $203 Ruehl chain SSF.  Remember, the Ruehl chain is being shuttered. 

Big picture, $161 SSF for a specialty apparel retailer is an embarrassment.  But, what makes this potentially the worst specialty apparel launch ever is the company’s disclosure that build-out costs for Gilly Hicks totaled $392 per gross square foot (see FY 2007 10-K filing).  For comparison: 

Likely to save further embarrassment, ANF management decided against providing the capital expenditure build-out costs for each chain in the company’s FY 2008 10-K filing. 

We fully expect Gilly Hicks to be shuttered soon.  All too often it takes management a long time to admit failure.  But, the Gilly Hicks brand launch will likely go down as the worst in specialty retail over the past decade. 

Of course, don’t expect any help from the sell-side analyst community.  They’re still telling their clients how much store growth potential the chain has over the next few years.  Not a chance.  

Who needs to drive 2-hours to an outlet store?  It’s one-stop shopping for ladies who lunch in the quaint town of Burlingame, CA where women can pick up a pipe, query a psychic, and choose from the latest in designer knock-off accessories at the local smoke shop. 

Cigars, newspapers, men’s special interest magazines, and rolling papers once dominated the dusty shelves at the town’s cigar shop.  But today, respectable $149 designer (Coach, Gucci, and Dolce & Gabbana) counterfeit handbags, wallets, and sunglasses have been infused into the assortment of this enterprising cigar store.

Times are changing.

Cigars… Psychics… and HANDBAGS???

On July 21, 2009, Starbucks (SBUX – $20.47) CEO Howard Schultz proclaimed that the company’s customer satisfaction research showed a dramatic “speed of service” improvement of “11 points.”  Do you believe him?  We don’t.

Naturally, almost every retail/restaurant has been touting improved customer service scores during the recession.  Despite CEO’s patting themselves on the back, it’s a pretty simple formula…

(Less Customers + Lower Employee Turnover) = Improved Customer Service    

We get a chuckle when CEO’s across the retail/restaurant community throw out the improved customer service scores on quarterly conference calls during the recession.  We’re of the belief that many of these CEO’s fail to recognize that a recessionary environment generally improves customer service scores. 

But, SBUX CEO Howard Schultz went a step further by proclaiming “speed of service” dramatically improved last quarter.  Who’s he kidding?  Has he been to a Starbucks location recently?  Anecdotal evidence would clearly suggest that wait times have materially increased over the past 9-12 months.

SBUX, like many retailers/restaurants, has greatly cut back on payroll hours over the past 12-18 months.  SBUX did a masterful job controlling store-level expenses in Q2 and Q3, payroll included.  But, the problem is that Mr. Schultz made a boastful statement that probably EVERY Starbucks customer would find extremely hard to believe… that wait times are shorter today than a year ago.  Wait times today are, in our view, painfully longer today versus a year ago.

Here’s Mr. Schultz’s quote from last quarter’s conference call:

“Since January 2009, not only have we seen improving transaction trends on a sequential quarter basis, but our research tells us we are making real progress on every measure of customer satisfaction, including partner friendliness, up seven percentage points; taste of beverage, up seven points; speed of service, up 11 points; and most importantly, overall customer satisfaction, up nine points.  These are statistically significant scores, especially considering today’s challenging operating environment.”