Macy’s off-price debut
On May 5, 2015, Macy’s (M) announced that it will enter the off-price business through four pilot stores in Metro New York City. Macy’s off-price stores, which will be called Macy’s Backstage, will compete with leading off-price retailers like TJX Companies (TJX), Ross Stores (ROST), Burlington Stores (BURL), and upscale department store chain Nordstrom’s (JWN) Rack stores.
Macy’s and other multiline retailers together make up ~6.3% of the portfolio holdings of the Consumer Discretionary Select Sector SPDR Fund (XLY).
Why does Macy’s want to venture into off-price retail?
Off-price retailers have performed better than department stores, as reflected in the same-store sales growth in the above graph. In the most recent fiscal year ending January 31, 2015, Macy’s reported 0.7% growth in its same-store sales, compared to 2.0% and 3.0% at TJX Companies and Ross Stores, respectively. Nordstrom’s 4.0% same-store sales growth was primarily due to the popularity of its off-price Rack stores, which have been continually outperforming the department chain’s full-line stores.
Off-price stores offer their merchandise at a 20% to 80% discount to the prices of comparable merchandise in department stores. Though consumer spending has improved, it appears that consumers are still cautious and prefer bargain hunting at off-price stores rather than shopping at upscale department stores.
Isn’t Macy’s entry a little late?
Off-price retailing is dominated by established players like TJX Companies and Ross Stores, which enjoy high margins due to their lean operating structures. Nordstrom, which opened its first Rack store in 1973, has seen considerable success in the off-price space. Nordstrom’s Rack stores have now outnumbered its high-end full-line stores. Other department stores like Neiman Marcus and Saks also have a presence in the off-price space.
Macy’s will first test its off-price model, Macy’s Backstage, with four pilot locations. The company plans to roll out additional locations based on consumers’ response. It will be interesting to see how Macy’s will make its mark in the already crowded US off-price retail market.
Read The Changing Face of the US Department Stores Industry, for more details.