The COVID-19 pandemic crushed Macy's (NYSE:M) business earlier this year, and while the worst appears to be over, sales trends remain weak by historical standards. The department store giant is suffering from a combination of weak demand for some of the products it sells, low mall traffic, and the unwillingness of some consumers to visit stores in person.

During Macy's recent second-quarter earnings call, management highlighted several ways it is adapting to the abrupt change in the consumer environment.

Doubling down on Backstage

Macy's had already made off-price retail a key part of its growth strategy before the pandemic struck. At its investor day in February, the company said it planned to continue adding more Backstage store-within-a-store locations to its full-line Macy's fleet while also opening new freestanding Backstage stores. During 2018 and 2019, existing Backstage stores -- even those attached to struggling full-line stores -- posted consistent comparable-store sales growth.

The pandemic has added to the urgency. While Backstage sales declined 45% year over year last quarter, that was significantly better than the 61% drop Macy's reported for total in-store sales. Sales trends at Macy's Backstage have continued to improve in recent months as the retailer has cleared out aged seasonal inventory and brought in fresh merchandise that is more in demand.

The entrance to a Macy's Backstage store-within-a-store

Image source: Author.

CEO Jeff Gennette noted on the recent earnings call that Backstage generates solid gross margin relative to rival off-price chains. Its biggest weakness from a profitability perspective is high distribution and logistics costs. That's largely a function of the concept's relatively low sales volume. By driving further comp sales growth, launching a Backstage e-commerce business, and opening additional locations (both freestanding and within Macy's full-line stores), Backstage will gain scale and become an important profit growth driver.

Looking to Bloomingdale's for growth

Reigniting growth at Bloomingdale's has also become a key priority for Macy's. In recent years, Bloomingdale's has been something of an afterthought for the company. The upscale department store chain accounted for about 11% of the company's revenue last year, and management had bigger fish to fry: namely, turning around the Macy's mass-market chain.

However, Bloomingdale's is currently benefiting from a jump in demand for luxury items in categories like home goods, jewelry, fragrances, and accessories. Company executives think some well-to-do consumers who can't spend money on travel due to the pandemic are shifting their dollars toward luxury purchases. Moreover, Bloomingdale's has an opportunity to gain market share from rivals that are closing stores or going out of business (including Barneys New York, Neiman Marcus, and Lord & Taylor).

In the short term, Bloomingdale's is working to tweak its merchandise assortment to capitalize on this shift in demand trends. Looking further ahead, management aims to continue the brand's momentum by testing a new small-format off-mall Bloomingdale's concept. The first such store is scheduled to open in the fourth quarter of 2021. If successful, this new store format could open up future growth opportunities by positioning Bloomingdale's in locations that many customers (and potential customers) would find more convenient than regional malls.

Leaning on home for a return to growth

Finally, like many other retailers, Macy's has found that consumers have a big appetite for spending money on their homes right now. Last quarter, revenue in the home/other category (which also includes heavily impacted items like restaurant sales) declined 15% year over year: about 25 percentage points better than the rest of the company.

Entering 2020, Macy's planned to deemphasize some lower-margin parts of its home department like kitchen electrics. In the current environment, it is looking to get the best of both worlds by adding new products through its vendor direct e-commerce program, which mitigates the margin headwinds in certain home categories by shifting the inventory risk to vendors. Meanwhile, Macy's is looking to continue its momentum in the highly profitable furniture and mattress categories.

Macy's certainly faces plenty of headwinds that could disrupt its recovery from COVID-19. But with two of the best-known brands in the country, a large and growing e-commerce business, a portfolio of valuable real estate, and a newly slimmed-down cost structure, investors shouldn't count Macy's out, either.

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