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Macy's Management Talks Omnichannel Strategy, Backstage Expansion, and More

By Joe Tenebruso – Sep 21, 2018 at 3:11PM

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Here's how the venerable retailer plans to win in the years ahead.

Macy's (M -1.45%) stock has shed about 15% of its value since its second-quarter earnings report. But during its earnings call, the company's leadership team spoke about some promising aspects of the retailer's business that investors may be overlooking. Here are three important points that long-term shareholders will want to know.

Macy's is strengthening its omnichannel capabilities

[O]ur recipe for success is healthy stores, a robust e-commerce business, and a powerful mobile app. Our customer wants a great experience anytime and anywhere she shops with us. -- Chairman and CEO Jeff Gennette

Investors typically focus on the performance of Macy's stores -- and rightfully so, as they generate the vast majority of the retailer's sales. Yet Macy's and pretty much all retailers' e-commerce and mobile operations are becoming more important every day. Gennette knows this and is attempting to position Macy's to compete in an increasingly online world.

The company is investing in its website and mobile app. It's also expanding its online assortment of merchandise and strengthening its in-store pickup program. These investments are helping to fuel double-digit growth in Macy's digital sales and more than 50% growth in purchases made through its app. Better still, they're helping to drive more traffic to Macy's stores. 

A Macy's storefront

Macy's omnichannel strategy is helping to improve the performance of its stores. Image source: Macy's.

Backstage is now front and center

We opened 47 Backstage stores in the second quarter for a total of 65 opened in the first half of the year. We're now on track to complete 120 openings this year. -- Gennette

Macy's has found success with its Backstage off-price concept, which offers heavily discounted items and a treasure-hunt style shopping experience. Rather than building stand-alone Backstage stores, the company has focused on adding these bargain-hunting destinations to existing Macy's stores. It's proven to be an effective strategy, as Backstage outlets are helping to boost sales and profits at many of the stores in which they're located. 

Macy's originally began adding Backstage outlets to its lower-tier stores. But based on their strong results, the company now is bringing Backstage to some of its best Macy's stores. "Adding Backstage makes existing stores more productive, gives our customers an exciting new experience, and will bring new customers into the brand," Gennette said.

Gennette believes that combining Backstage discount outlets with Macy's full-price stores provides the company with an advantage over rivals, which typically offer just one type of shopping experience at a particular location. Judging by the early results of the combined stores, Gennette appears to be correct.

Macy's dividend is well-secured

Cash flow from operating activities of $544 million for the first half of the year was consistent with the prior year. ... We ended the second quarter with $1.1 billion in cash, $286 million more than last year. -- CFO Paula Price

The growth of its e-commerce operations and improving performance of its stores are helping Macy's generate an impressive amount of free cash flow. This, combined with more than $1 billion in cash reserves, is allowing Macy's to reinvest in its business, pay down debt, and return capital to shareholders via a hefty 4.2% dividend. As such, a dividend cut appears unlikely in the foreseeable future. Macy's could even begin to ramp up its share repurchases if its operating results continue to improve in the quarters ahead.

Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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