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CEO: Proposed tariffs could impact Macy's FY'19 EPS outlook

Newly proposed 10% tariffs on $300 billion in Chinese imports into the U.S. could deal a 5-cent hit to Macy's Inc.'s full-year earnings, the retailer's CEO and Chairman Jeffrey Gennette said Aug. 14.

"We recognize that our risk to annual guidance in 2019 would be no more than one nickel," Gennette said during an Aug. 14 call discussing the retailer's second-quarter earnings with analysts.

Macy's did not include any potential impact from tariffs in its full-year adjusted guidance, which the retailer cut by 20 cents from previous forecasts to a range of $2.85 to $3.05. The cut, executives said, followed second-quarter earnings that missed expectations and sent the retailer's shares tumbling by 13.4% in afternoon trading Aug. 14 to $16.78.

Macy's does not plan to pass added costs from the new tariffs to consumers, Gennette said, citing prior unsuccessful attempts to raise prices following previous tranches of tariffs.

"We did play with selective price increases in categories like luggage and housewares and in parts of furniture. And we learned from that experience that the customer had very little appetite for those cost increases so we had to make adjustments," Gennette said.

The U.S. Trade Representative on Aug. 13 said the imposition of proposed 10% tariffs on some products including clothing, footwear and toys has been delayed to Dec. 15. Other items have also been removed from the initial list of items subject to duties. However, President Donald Trump has threatened the remaining new tariffs could shoot up to 25% or higher.

Higher tariffs could cause Macy's to reconsider whether to pass on added costs to customers, Gennette said.

"You're dealing with a whole lot of series of dynamics that I would not say we wouldn't have to raise prices," Gennette said.

The retailer's executives said they are continuing to work with vendor partners and suppliers in China to mitigate the impact of the tariffs.

Macy's second-quarter results fell below the company's own expectations. Executives said unanticipated markdowns in an effort to clear its inventory, which impacted the gross margin by 1 point, combined with the 9% decline in its international tourism business contributed to its underperformance in the quarter.

"Certainly, Brexit is affecting us. China is depressed," Gennette said about the decline in sales from international tourism.

To avert future inventory challenges, the retailer has deployed new leadership to oversee its women's sportswear private brands, the prime category that lacked inventory management. This was in addition to taking strategic steps in allocating and marking its inventory.

"Receipt planning is leaner, and we will have merchant liquidity as we move through the fall season to buy opportunistically so we feel good about that. Our fall promotions are more precise ... and the productivity projects that we've been testing up to this point ... like hold and flow and markdown optimization, they really are ready to scale in the fall, and so we anticipate benefits coming from those as well," Macy's CFO and Executive Vice President Paula Price said.

The company is also piloting a partnership with thredUP, a fashion resale website. Macy's will carry merchandise from the resale website across 40 stores nationwide with the expectation of attracting new customers seeking brands and styles the retailer does not typically carry.

"We're merchandising where we saw holes in our inventory with this re-commerce play, and this idea that it was preowned is very attractive to many customers not just because of the price but also because of the sustainability," Gennette said.