Internal competition = Opportunity in retail

Steve’s breakdown: So the line that matters is “Whichever model — Macy’s Bluemercury or its Backstage brand — performs best this year will be rolled out “aggressively” in 2018″.

So pick one, I would go with Backstage, and see how you can help get it over the finishline.

CINCINNATI, OH: On the heels of a disappointing earnings report, Macy’s saving grace could be a strategy to focus more resources on growing its off-price brand, Macy’s Backstage, outside of Macy’s full-price department stores.

“We’re hoping that by the end of this year, we have a scaleable [off-price] model to aggressively roll out in the future,” CEO Jeff Gennette said Thursday on the company’s earnings conference call.

Gennette, who succeeded Terry Lundgren as chief executive just last month, has already made clear his plans to end a two-year streak of negative same-store sales for the retailer, and to make Macy’s more of a competitor with off-price chains, bringing a model similar to that of Ross Stores or T.J. Maxx into malls.

Earlier Thursday, Macy’s reported earnings, revenue and comparable store sales — a metric closely monitored for retail stocks by Wall Street — that all fell short of analysts’ estimates, sending shares of the stock tumbling more than 13 percent. The results showed further deterioration of the company’s performance.

“These are unusual and challenging times for retail, especially formal-based department stores,” Gennette told analysts and investors shortly after the weaker-than-expected results came out.

The CEO went on to discuss key strategies that will allow the company to “stabilize [its] brick-and-mortar business”: one of those being growing Macy’s off-price brand.

Little by little, Macy’s has been rolling out Backstage during the past two years, dedicating square footage in its current department stores to test an off-price strategy and trying to avoid any overlap, or “cannibalization,” between the two brands.

“We now have 26 Backstage stores open within our Macy’s stores and are adding 19 more this year,” Chief Financial Officer Karen Hoguet confirmed on Thursday’s earnings conference call.

“This performance, as well as the results of our last … clearance strategy, are both encouraging. We see customers liking the everyday deep value opportunity being offered within our mall locations. We are testing a few variations of our strategy this year, but we believe from our tests so far that this will both add incremental spend from existing customers and also lead to the addition of new customers.”

Whichever model — Macy’s Bluemercury or its Backstage brand — performs best this year will be rolled out “aggressively” in 2018, Hoguet said, reaffirming what Gennette had to say.

“Seventy percent of millennials shop off-price on a monthly basis,” Gennette added, saying this is one reason Macy’s decided to pursue a strategy apart from its traditional, full-price department stores.

“What we find with this … where we have [Backstage] in a freestanding store, in a Macy’s full-price store, the entire building is lifted by a very nice level,” he said.

At a time when e-commerce giant Amazon is becoming a bigger competitive force for many retailers, Macy’s needs some sort of new strategy to stay relevant with consumers, and coax them into its stores. If it’s executed correctly, the off-price model could do well, one analyst said.

“There is no doubt that Backstage is a good concept and one that Macy’s should pursue, but we believe it is better suited to stand-alone locations in units where rents are cheaper,” said Neil Saunders, managing director at GlobalData Retail, in an email.

“Overall, our sense is that Macy’s now has a much clearer sense of direction and it has a rudimentary road map to help it get to where it wants to go,” Saunders wrote.

Macy’s CEO Gennette said the company will discuss more details about Backstage, among other initiatives, at its investors’ meeting on June 6.

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