May 11 Macy's year-old strategy of opening
its Backstage off-price chain within its existing department
stores drives traffic into the main store, the retailer said on
Thursday, but analysts said the move confuses customers and
could hurt Macy's longer-term results.
Macy's reported a bigger-than-expected fall in quarterly
profit and sales, hurt by sluggish demand for discretionary
items like apparel and an inability to retain shoppers who are
Despite the poor performance, the retailer doubled down on
its in-store discounting plans and said it will open 19 more
Backstage stores within existing Macy's stores to drive traffic
and sales. Macy's has so far combined 26 such stores.
Backstage discount stores sell excess and off-season
inventory at steep discounts and compete with the likes of
Nordstrom Inc's Nordstrom Rack and TJX Cos.
Macy's said 70 percent of millennial and two-thirds of their
best customers shop off-price items on a monthly basis. These
core customers like the opportunity to find merchandise that
offers a "deep value" within existing locations, it said.
"We are encouraged by the performance of these combined
stores, where the total store sales are being lifted," Chief
Financial Officer Karen Hoguet said on the company's conference
Macy's also assured investors it is careful not to add
merchandise in the discount format that would hurt sales in the
Despite the assurances, analysts said the strategy risks
undercutting full-price sales in the longer term, a development
that puts Macy’s higher-margin sales at risk.
"As much as we can see the logic for this from the
perspective of trying to make space more productive, we believe
the strategy will ultimately fall short," said Neil Saunders,
managing director of research firm GlobalData.
Saunders said customer data shows evidence that such moves
send confusing messages to shoppers about the Macy's brand.
Ken Perkins, founder of research firm Retail Metrics, said
he is skeptical the move will make consumers buy full-price at
such locations, especially as they get used to finding bargains.
"Traffic is obviously going to come at lower average unit
retail and smaller transaction prices and those consumers are
unlikely to gravitate to the other part of the store."
Steep discounts have hurt margins of department store
operators, resulting in weaker quarterly results and bleaker
But Macy's is confident the move will offer it the distinct
competitive advantage of tapping into shopping mall foot
"Most of our ferocious off-price competitors are off mall
right now," Chief Executive Jeff Gennette said. "We do hope that
we will have a viable off-price concept that is on mall... that
millions of American consumers come to each and every day."
(Reporting by Nandita Bose in Chicago and Sruthi Ramakrishnan
in Bengaluru, Edited by David Greising and Dan Grebler)