Touting off-mall success, Macy’s mulls acceleration of small-store strategy

Dive Brief:

Macy’s on Thursday reported a Q4 net sales decline of 4.6% to $8.3 billion, with comps down 2.7%. Comparable sales at namesake Macy’s fell 3.3%, at Bloomingdale’s rose 0.6%, and at Bluemercury rose 7.2%.
Gross margin shrank to 34.1% from 36.5% a year ago. Merchandise margin declines were largely from higher markdowns and promotions necessitated by competition and inventory management. Inventory was down about 3% versus 2021 and about 18% versus 2019.
Net income tumbled 31.5% to $508 million, according to a company press release.

Dive Insight:

Macy’s move to exit declining malls and open smaller stores in strip centers and other off-mall locations has been so successful that the department store may accelerate that shift sometime next year, CEO Jeff Gennette told analysts on Thursday.

The company runs eight smaller Market by Macy’s and two Bloomie's stores, averaging about 30,000 to 40,000 square feet, about a fifth the size of its mall anchor stores. At the five Market by Macy’s that have been open for more than a year, Q4 comps rose 8%, and at the one Bloomie’s open that long, comps in the period rose 12%, he said. Compared to mall stores, these smaller formats receive customer scores that are 25 to 30 points higher on layout, neatness, ease of checkout and customer service; two and half times more traffic; “significantly” higher conversion; and superior customer acquisition rates, he said. Moreover, cannibalization is lower than anticipated in areas where the new smaller store opens in an existing Macy’s trade area.

For now, plans are to open four new Market by Macy’s and one Bloomie's this year, Gennette said, noting that these stores perform best when they share a location with off-price retailers or grocers.

“If new locations continue to outperform, we will look to incrementally accelerate off-mall openings beginning in 2024,” he said. “With our strong liquidity position, we are prepared to take advantage of opportunities as they present themselves. We are currently evaluating the right number and mix of on- and off-mall locations.”

The off-mall tactic is just one of five that underpin Macy’s latest strategy. The others include an effort, already underway, to revamp the department store’s private labels, through an overhaul of its existing brands and the launch of new ones; a focus on luxury, whose success has been demonstrated by strong results at Bloomingdale’s and Bluemercury; stronger communications with existing loyalty members; and an expansion of the new online third-party marketplace, Gennette said.

“We currently have 24 private label brands in the Macy's portfolio, which combined represented roughly 16% of Macy's 2022 sales,” he said. “Over the next three years, we will rigorously evaluate all of them, and we'll refresh, reimagine and replace brands.”

The company will add 2,000 brands to its Macy’s marketplace and will launch a Bloomingdale’s marketplace in the back half of the year, he also said.

Despite Macy’s confidence in its off-mall strategy, the company is mostly finished closing its mall-based locations, having scaled back the 2020 plans that called for the closure of 125 stores, Gennette said, noting, “Our ecosystem and customer are dramatically different today.”

Since then, 80 Macy's locations have closed permanently, with another five slated for this year.

“We have shuttered our most significant underperformers, exited dying centers and improved the existing store experience while delaying closures of others that are cash-flow positive,” he said. “Today, roughly 99% of our mall base is profitable on a four-wall basis.”