Macy's (M -0.66%) less bad second-quarter earnings has the retailer thinking about expansion again, but it won't be in shopping malls.

The department store chain told analysts yesterday that while it believes top-tier malls will survive, the future is in smaller off-mall locations. Over the next two years it will be opening several Macy's and Bloomingdale's stores in just such formats.

Macy's Herald Square store

Image source: Getty Images.

Going where the customers are

The shopping mall is dying, and the situation has been critical since before the coronavirus pandemic struck. Dozens of retailers have declared bankruptcy and Macy's and other retailers are closing numerous locations as the economics no longer support having such sprawling operations.

In February Macy's said it was closing 125 of its 771 stores over the next three years, but yesterday CEO Jeff Gennette said it is monitoring mall performance and could adjust those timelines. 

Despite committing to ensuring its existing locations help make shopping malls a "vibrant" experience for consumers, it will also be testing small, off-mall locations in Atlanta, Dallas, and Washington, D.C.

It will open its first small-format Bloomingdale's in the fourth quarter of 2021 and it will be expanding its mini-Macy's Market at Macy's concept with a second location in Dallas next year. Additionally, it plans to open several more freestanding Backstage discount stores, test an online version of the concept, and continue expanding Bloomingdale's The Outlet.

"We continue to believe that the best malls in the country will thrive," Gennette told analysts. "However, we also know that Macy's and Bloomingdale's have high potential off-mall and in smaller formats."

The real crux remains whether the Macy's brand still has the power to pull in consumers, regardless of where its stores are located.