A few years ago, department store giant Macy's (NYSE:M) decided to test an off-price retail concept to help it compete more effectively with the likes of TJX and Ross Stores. The result was Macy's Backstage, which has now become one of the company's top growth initiatives.

Macy's plans to dramatically expand the reach of Backstage during 2018, roughly tripling the number of locations it operates. Furthermore, the company appears to be building a foundation for further growth of Macy's Backstage in 2019 and beyond.

Developing and testing the Backstage concept

For the past several years, Macy's has been in "test and learn" mode with respect to Macy's Backstage. It started in 2015 by opening six stand-alone Backstage stores with 25,000 to 35,000 square feet of space -- roughly in line with the layout of other off-price stores.

In 2016, Macy's shifted to opening Backstage outlets within its existing full-line stores. It chose a handful of lower-traffic locations, with the idea that it could carve out 20,000 square feet of unproductive space to make room for the Backstage section without hurting sales in the rest of the store. Putting Macy's Backstage into existing stores allows the company to save on rent -- and also gives customers another reason to visit the mall.

The interior of a Macy's Backstage store

Since 2016, Macy's has been opening Backstage outlets inside full-line stores. Image source: Author.

During 2017, Macy's continued the Backstage rollout, expanding to about 45 store-within-a-store locations. It also tweaked the merchandise assortment, leading to better sales results. By the end of 2017, stores with new Backstage outlets were seeing a roughly 7 percentage point sales lift relative to the control group, up from 4.6 percentage points in 2016.

The national rollout has begun

In early 2017, Macy's announced that it planned to open about 50 additional Backstage locations by the end of 2018. However, the company has significantly increased its ambitions, due to the promising results of its tests. Macy's now expects to open about 100 Backstage outlets in 2018 alone, 20 of which opened in the first quarter.

The 2018 growth plan will make Macy's Backstage a national retail concept, whereas it had been heavily concentrated in the Northeast previously. With this expanded footprint in place, the company will start marketing Backstage, rather than relying on walk-by traffic. This marketing support could drive a significant increase in sales.

Macy's will also test Backstage in some of its better-performing stores this year. It has created a smaller, 10,000-square-foot design so that it doesn't have to carve out as much space in these stores, which are already performing well.

Laying the groundwork for future growth

Macy's hasn't set a long-term target for how many Backstage stores it will operate. However, it's clear that the company plans to continue expanding beyond the roughly 150 locations it will have at the end of this year.

Last week, Macy's announced that it will open the first dedicated Macy's Backstage distribution center in the fall of 2019. The new facility will be located in Columbus, Ohio, and will employ about 400 workers.

This distribution center represents a significant investment for Macy's. Management's willingness to commit capital to this project -- and to the store renovations needed to open new Macy's Backstage outlets -- indicates that Macy's leadership continues to see Backstage as one of the biggest opportunities for the retail icon to improve its sales and earnings performance.

Adam Levine-Weinberg owns shares of Macy's and The TJX Companies and is long January 2019 $50 calls on Ross Stores and short January 2019 $90 calls on Ross Stores. The Motley Fool recommends The TJX Companies. The Motley Fool has a disclosure policy.