Macy's Teams With Alibaba Group to Test E-commerce In China

Expansion Plan Follows Weak Earnings From the U.S. Retailer

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Macy's is pairing with Hong Kong-based Fung Retailing Limited to bring the U.S. department-store chain to China, the companies announced on Wednesday. The joint venture will begin with an e-commerce pilot on Alibaba Group's Tmall Global, an online marketplace where foreign brands and merchants can sell to Chinese consumers. The deal will bring a curated assortment of Macy's merchandise to China later this year.

"We are very excited to be working with such a great partner to begin to build a business at one of the world's largest and fastest growing consumer marketplaces," said Karen Hoguet, chief financial officer at Macy's, on a conference call. "Our game plan is to start small and use a test-and-learn approach as we move forward."

The effort aims to expand the Cincinnati-based retailer's global presence and make it more recognizable to Chinese expats and tourists visiting the U.S. "We also believe that by increasing the presence of Macy's in China, we will actually help our business here as well, both with Chinese tourists as well as Chinese residents," said Ms. Hoguet.

Other U.S. retailers including Gap, Inc. have also built up their presence in China in recent years.

"We have been watching and studying the China market for several years, especially given the explosive growth of e-commerce in China," said Jim Sluzewski, a spokesman for Macy's. "We learned that success in China requires a strong local partner, which is what we have found in Fung Retailing. So we are off and running."

There are no physical Macy's stores slated for China, the retailer said, but they could factor into future expansion plans if the e-commerce pilot is a success. The move follows a trend by other foreign retailers including Topshop and Costco, which launched in China through e-commerce rather than actual stores.

The Hong Kong-based joint venture, called Macy's China Limited, is 65% owned by Macy's and 35% owned by Fung Retailing. Macy's China Limited plans to invest $25 million in operations over the next 18 months, of which Macy's will fund 65%.

News of Macy's expansion into China came as the U.S. retailer posted weak second quarter earnings after resorting to discounts to clear seasonal inventory that arrived late. Profit in the three months through Aug. 1 was 64 cents a share, Macy's said in a statement on Wednesday. Analysts projected 76 cents, on average.

Comparable sales on an owned-plus-licensed basis fell 1.5% in the second quarter. Analysts had estimated revenue on that basis would gain 1.3%. The measure includes sales from stores open at least a year, as well as from its online operations and departments licensed to third parties.

Following poor performance in its first two quarters, Macy's cut its forecast for the current fiscal year, saying owned plus licensed comparable-store sales will be little changed. That's down from the company's previous projection for a gain of about 2%.

"We are disappointed in our second quarter results, which were impacted by a variety of factors, both internal to the company and in the macroeconomic environment," said Macy's Chairman and CEO Terry Lundgren, in a statement. "We expect an improvement in trend beginning in the second half of 2015 based on a range of promising new strategic initiatives, including those initially announced in January, which we believe will transform our company in the years ahead."

The retailer outlined plans for future growth, which include beefing up Macy's e-commerce business by expanding same-day delivery and buy online pickup in store options; Macy's Backstage off-price stores, which the retailer will begin testing in September; opening 10 new Bluemercury beauty and spa retail locations, upping the total to 77; and exploring e-retailing in China starting in late fall 2015.

Macy's does not expect the China initiative to have a material impact on its earnings in the current fiscal year. Current plans call for Macy's e-commerce sales of approximately $50 million in China in 2016.

-- Contributions from Angela Doland and Bloomberg News --

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