Early results for Macy’s high-profile experiment with small-format stores are in: The sites don’t appear to be stealing sales from its mall locations, a finding that could prompt more chains to pursue similar strategies that could change the look of retail property across the country for years to come.
Macy’s, with 781 stores including its namesake chain as well as Bloomingdale’s and Bluemercury, reported Thursday overall sales dropped about 7% to $4.98 billion from the year-earlier quarter — and comparable store sales dipped 7.2% — as consumers watched their spending in the face of macroeconomic headwinds. That prompted Macy’s to lower its estimated results for the year.
The bright spot for New York-based Macy’s was a “bullish” performance by its fledgling off-mall, small-format Market by Macy’s and Bloomie’s stores, according to Macy’s president and its CEO-elect, Tony Spring. He’s been named to take over when current Macy’s Chairman and CEO Jeff Gennette retires in February.
Macy’s was one of the first national retailers to debut curated small-format stores, outside of malls, in an attempt to efficiently and cost-effectively expand their brick-and-mortar presence in a market or enter a new area.
Now a slew of companies is following Macy’s in embarking on the same type of test to get closer to their customers, including chains such as Target, Kohl’s and Ulta Beauty. Several retailers are forsaking placing stores in malls.
Market by Macy’s stores, one-fifth the size of the chain’s flagships, and Bloomie’s, a pint-sized version of its luxury brick-and-mortar sites “allow us to optimize our total store portfolio at both Macy’s and Bloomingdale’s through replacement, densification and new-market opportunities,” Spring said in a conference call with Wall Street analysts.
The small-format stores may not be in malls, but they are generally in shopping centers as opposed to standalone locations. The new formats are among the cornerstones of Macy’s growth strategy, with the company looking for additional potential sites for those formats, according to officials.
“They balance our traditional large-format, on-mall locations with a more localized off-mall experience that’s physically closer to our existing and target customers, encouraging a higher frequency of trips,” Spring said. “We are continuing to enhance these stores and are learning every day how we can better serve our customers.”
The retailer has eight open Market by Macy’s locations and plans to open four more this year. Also, Macy’s is slated to debut a Bloomie’s in Seattle this fall, adding to the two stores already open.
“Results are very encouraging,” Spring said. “During the first quarter, our small-format stores opened at last one fiscal year achieved positive comparable owned-with-licensed sales growth. Customer experience scores, particularly regarding the physical environment, ease of checkout and colleagues being helpful and available are high.”
Moreover, the small-format stores aren’t diverting sales from mall stores, according to Spring.
“Interestingly, we are experiencing limited to no cannibalization in existing markets where we open off-mall formats,” he said. “Instead, customers are making additional shopping trips. Long term, we remain bullish about the small-format store opportunity, as off-mall retail continues to be a dominant in-person shopping method for U.S. consumers and we’re evaluating potential locations to enable accelerated growth.”
Even so, the smaller stores might not have a big effect, Neil Saunders, a managing director at GlobalData, said Thursday in a research note.
“Macy’s also continues to experiment with its smaller off-mall format, in response to the evolution in where people shop,” Saunders said. “However, these are modest initiatives that don’t do much to move the needle or reverse decline in the wider business. We remain pessimistic about the long-term prospects for Macy’s. The new CEO, who will take charge in February 2024, may shake things up more. But until and unless that happens Macy’s will continue to bump along the bottom.”
On the earnings call, Gennette said Macy’s faced a tougher struggle than expected in its first quarter.
“Demand trends began to worsen in mid-March and further de-accelerated in April,” he said. “We believe cooler temperatures and headlines surrounding layoffs and the banking crisis were factors. But so were the compounding effect of some previously identified macro headlines.”
He added that “the U.S. consumer, particularly at Macy’s, pulled back more than we anticipated as they reallocated spend to food, essentials and services.”
In part, the retailer’s woes were because it had stocked up on spring merchandise when the weather turned out to be cool while shoppers wanted warmer apparel, according to Gennette.
The decline was most pronounced at the Macy’s chain. Macy’s has the largest exposure to lower- and middle-income consumers, with 50% of its customers having an average household income of $75,000 or under and 85% an income of $50,000 or lower, Gennette said. It had a comparable sales drop of about 8% on an owned-and-licensed basis.
The retailer plans to address its revenue troubles by rolling out a lot of promotions and discounts and offering more apparel for any time of the year, according to Gennette.
Based on Macy’s results, analyst Saunders expressed concern about the company’s future.
“Macy’s kicks off its fiscal year as a company in retreat,” he said in the note to clients. “The growth experienced during the pandemic is now firmly behind it as notches up its fourth consecutive quarter of falling sales.”
He added that “worryingly, the pace of decline has accelerated in a sign that the business is starting to struggle against the backdrop of a tightening economy. In many ways this is a reversion to pre-pandemic form when Macy’s was in a state of perpetual decline.”
However, Macy’s planned expansion of its off-price, or bargain, store-within-a-store Backstage sites, may help the retailer, according to Saunders.
Macy’s didn’t immediately respond to an email seeking a response to Saunders’ comments.
