How Macy’s Can Help This Smaller Retailer Profit

With 840 huge anchor stores in malls across the United States, Guam, and Puerto Rico, Macy's (NYSE: M  ) is one of the largest retailers in the country. The company has had huge success with a target demographic of middle-class women. The chain captures sales by selling exclusive fashion lines and high-demand brand-name items. This year, Macy's will welcome a surprising name to its newer store-within-a-store concept.

Locker Room by Lids, a new joint venture between Macy's and Genesco (NYSE: GCO  ) , will roll-out to Macy's stores this fall. The new venture will open in 25 stores and online via the Macy's website. The stores will feature college and professional sports-licensed items in categories like hats, apparel, glassware, throws and custom embroidery.

After the initial 25 Locker Room by Lids stores, Genesco and Macy's will open 175 more in the spring of 2014. Stores will have an average square footage of 500 to 1000. Lids will also put interactive kiosks in stores for customers who wish to place online orders and have items shipped to their homes or other locations.

The stores will be operated by Lids Sports Group under a license agreement with Macy's. The initial launch of the Locker Room by Lids stores will place stores in Macy's in cities with professional or college sports teams to capitalize on demand for sports hats and apparel.

This has the potential to be a home run for Genesco and its Lids business segment. By getting its stores in Macy's, the company will be able to target women shoppers who likely don't spend a lot of time in their small hat stores in mall and airport locations. By targeting cities with built-in fan bases, Genesco and Macy's will be able to capitalize on the strength of the partnership from the initial launch. Macy's provides a nice way for Lids to expand itself without cannibalizing sales by attacking a new demographic.

Back in September, I highlighted the potential of Genesco. The retail company saw same-store sales growth across all business segments. Since that time, sales have declined in many business segments, including the Lids division. In fiscal 2013, Lids had sales of $791.3 million, which was 4% higher than the previous year. The Lids segment made up 30% of Genesco's total fiscal-year sales.

Same-store sales at Lids and Hat World locations declined 3% in fiscal 2013. This was the only business segment of Genesco that saw comparable sales decline for the year. In the most recent first quarter, same-store sales at Lids locations declined 6%. Total sales for the first quarter declined 1.5% to $591 million.

Following in this company's footsteps

Genesco hopes it can have the same success Finish Line (NASDAQ: FINL  ) has had with its store-within-stores in Macy's department stores. Macy's announced on its recent earnings call that Finish Line stores were outperforming expectations. After the initial launch, Macy's is now rolling out 450 shops by next year, which would put a Finish Line in over half of the Macy's around the country. Macy's had expected a 20-to-30 basis-point lift from Finish Line, but saw a 100 basis-point lift in the second quarter.

Finish Line shares are up 18.6% in the calendar year. The chain is seeing a new audience of women through its Macy's partnership. The company's shares should be bought on weakness because the chain will likely take market share away from Foot Locker and grow its sales. Analysts are expecting double-digit sales growth of 13.6% and 10.8% in fiscal 2014 and fiscal 2015, respectively.

Winning strategy

Macy's continues to have success with its retail strategy. In the second quarter, earnings per share increased 7.5% to $0.72. Total sales declined 0.8% to $6.1 billion. Shares of Macy's have increased 20.9% on the calendar year. This comes on the back of a strong first quarter and poor second quarter.

Macy's is completing a turnaround and introducing its store-within-a-store concept to boost sales across its locations. Shares continue to look attractive, as other retailers like J.C. Penney struggle. Macy's has a winning concept and should be bought on weaknesses.

Conclusion

Shares of Genesco are up 29% on the year. This seems surprising despite declining sales across several of the company's business segments. This partnership with Macy's has the potential to transform the company's Lids division and boost sales. Analysts see sales growing 4.8% and 8% in the next two fiscal years, respectively. With the Macy's partnership, Genesco may be able to pull double-digit sales gains. Genesco is a winning retail play for investors. 

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