Less than a year ago, investors had left Macy's (M -2.84%) for dead. Macy's stock bottomed out at $17.41 in November 2017, down more than 75% from the all-time high it had reached two years earlier. Yet Macy's stock has doubled since hitting that low, driven by three consecutive quarters of rising comparable-store sales and improving profitability.
However, Macy's stock has fallen into a bit of a rut recently, with shares down about 16% since the company's Q2 earnings report. Clearly, investors are nervous about whether Macy's momentum is sustainable.
Macy's has been working on a number of sales initiatives that are just starting to kick in. The company's ongoing foray into virtual reality (VR)-enhanced furniture departments marks just one promising way that Macy's can keep sales growing beyond 2018.
Macy's VR furniture pilot has been a success
Back in March, Macy's announced that it had begun testing virtual reality technology in three stores' furniture departments. Customers use tablets to sketch out the dimensions of one or more rooms and arrange items from Macy's furniture collections within them. They are then given VR headsets to virtually try out their new furniture pieces.
The VR technology Macy's is using makes it easier to visualize how new furniture would fit in a customer's home. The goal is to give customers confidence in their purchase decisions so that they'll be more willing to open their wallets.
The early results are very encouraging. Average basket size has increased by 60% in the pilot stores compared to stores that don't have the VR technology yet. This indicates that customers are buying more furniture pieces at one time when they have the ability to visualize how they would work together in a space. Furthermore, the return rate is less than 2% for customers who use the VR experience.
Program expansion is on track
As previously planned, Macy's is now expanding its VR furniture department initiative from a pilot phase to a broader rollout. It has already deployed VR technology in 50 additional stores beyond the initial three pilot locations. By early November, another 16 locations will be upgraded with the new VR technology.
The 2018 rollout of virtual reality is concentrated in Macy's biggest furniture departments. In fact, 24 of the 69 locations that will have VR technology by year-end are furniture-specific stores. Another four of the locations are home stores.
Furthermore, Macy's seems to be focusing on some markets more than others in the initial rollout of this exciting technology. More than a quarter of the stores getting the VR furniture experience are in California. The New York, Atlanta, and South Florida metro areas (combined) also account for more than a quarter of the VR furniture departments.
Looking ahead: A tool to shrink stores
Right now, the primary goal of the new VR technology is to give customers the confidence to buy more furniture (including full room sets) at Macy's. However, looking ahead, VR could enable Macy's to shrink the amount of space it devotes to furniture. At a recent conference, CEO Jeff Gennette noted that with VR technology, Macy's can offer a full range of furniture with as little as 5,000 square feet of space -- down from 20,000 square feet previously.
This will enable Macy's to expand furniture sales at its smaller stores. In the long run, it also will make it easier for Macy's to cash in on some of its valuable real estate.
For example, with less space needed for furniture, Macy's may be able to consolidate some of its stand-alone furniture galleries and home stores into nearby full-line stores without losing much in the way of sales. This would probably lower operating expenses while allowing Macy's to sell or redevelop the furniture gallery or home store.
The ongoing rollout of VR technology in its furniture departments is just one way that Macy's is adapting to become more competitive in today's retail market. With Macy's stock trading for less than 10 times earnings, a little bit of growth could drive big gains for shareholders.