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More Macy's Stores May Be Dark for the Holidays, and That's a Good Thing

By Rich Duprey - Oct 24, 2020 at 10:00AM

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But the retailer isn't turning out the lights on a new growth opportunity.

Macy's ( M 1.23% ) is closing at least two of its mall anchor stores and turning them into fulfillment centers. Heading into the all-important holiday shopping season, the move could be seen as a leading indicator of trouble for the financially strapped retailer.

However, because Macy's is counting on the stores to service its e-commerce ambitions, the development of so-called "dark stores" is actually a hopeful sign, though investors probably shouldn't go betting the farm on a full recovery.

Macy's Herald Square store at night

Image source: Macy's.

Dark days ahead

Macy's is viewed by many as being barely a step or two ahead of bankrupt rival J.C. Penney. It suffered steep second-quarter losses as it was pummeled by the coronavirus pandemic that caused sales to plummet 36% to $3.5 billion on a 35% drop in comparable-store sales.

Yet having invested heavily in its digital presence over the years, the department store chain was able to supplement the lack of physical store sales with a healthy 53% gain in online sales. It may not have been enough to offset in-store sales that tumbled 61% from the year-ago period, but it showed Macy's the way forward.

The retailer was already discounting whatever benefit its mall locations could deliver, announcing that if it opened new stores or expanded, it would site them at off-mall locations. It's not abandoning malls completely, but it knows they're not going to be delivering the growth it needs to survive.

So closing down two mall stores to have them fulfill orders placed through its bustling e-commerce platform makes perfect sense, and it wouldn't be surprising if Macy's closes additional mall stores to do the same.

A hint of things to come

CEO Jeff Gennette told analysts during Macy's second-quarter earnings conference call that 30% of the retailer's digital sales were fulfilled through its stores and he only sees it growing.

To meet the demand, Gennette said Macy's was continuing to build out its omnichannel network and fulfillment strategies, obviously hinting at the dark stores to come. The chain certainly has more than enough underperforming stores to choose from. And with its plan to close nearly 100 stores over the next few years, this dark-store experiment gives it the opportunity to see if those locations might actually work better as fulfillment centers.

Macy's had only six direct-to-consumer warehouses at the end of last year and another 18 locations dedicated to its stores, and this could be the model to expand upon.

Light in the darkness

Dark stores are not new, but they're growing in popularity since the coronavirus outbreak shut down retailers across the country. 

Earlier this year, Bed Bath & Beyond CEO Mark Tritton told analysts the home goods retailer had converted about a quarter of its namesake and buy buy Baby stores into regional fulfillment centers when they closed.

He told analysts, "The regional fulfillment stores have doubled the capacity of our entire fulfillment network, facilitating approximately 44% of our overall value orders, with almost 40% of these orders being fulfilled within 50 miles of the customer's home."

Walmart is also experimenting with them, though the stores it's designated as dark are for fulfilling online grocery orders rather than general merchandise.

A bright future

Macy's continues to invest in digital initiatives, even if the e-commerce bonanza it enjoyed during the pandemic moderates as its physical stores reopen.

Earlier this month, the retailer partnered with DoorDash to offer same-day and next-day delivery services from 500 Macy's and Bloomingdale's stores in 47 states on orders placed through its website and via its mobile app.

Macy's still needs to prove it has the selection and service consumers want to drive them to its e-commerce platform, something that wasn't always apparent at its physical stores. Yet going dark with these two stores to offer online fulfillment is one of the retailer's brightest ideas in awhile.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Macy's, Inc. Stock Quote
Macy's, Inc.
M
$27.13 (1.23%) $0.33
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$139.00 (1.08%) $1.49
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
JCPN.Q
Bed Bath & Beyond Inc. Stock Quote
Bed Bath & Beyond Inc.
BBBY
$18.58 (4.03%) $0.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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