After losing market share to off-price retailers for years, Macy's (M 0.16%) decided back in 2015 to develop its own off-price concept: Macy's Backstage. Since then, it has grown Backstage to more than 270 locations across the U.S.
Last week, Macy's confirmed that it will continue expanding the Backstage concept at a rapid pace in 2022. Let's take a look at the iconic department store chain's plans.
A bright spot for Macy's
After initially testing stand-alone off-price stores in 2015, Macy's shifted its focus to opening Backstage shops within full-line Macy's stores in 2016. Following a successful pilot, the company decided to roll out the concept broadly beginning in 2018.
By early 2020, Macy's had over 200 Backstage locations -- nearly all within its full-line stores -- and planned to end the year with 274 Backstage stores. The COVID-19 pandemic forced the company to postpone some of its off-price expansion plans, though.
That said, Backstage dramatically outperformed the rest of Macy's brick-and-mortar business during the pandemic. This trend continued as the U.S. economy began to reopen in earnest last year, encouraging Macy's to continue expanding the concept. For example, in the third quarter, sales growth for the Backstage store-within-store format exceeded the sales performance of Macy's full-line stores by 24 percentage points (compared to 2019).
Building on this success, Macy's began testing an expansion of the freestanding Backstage store concept. It opened two new stores in the Dallas-Fort Worth area last year, complementing the original six stand-alone Backstage locations it opened in the New York area in 2015.
More store-within-store locations coming soon
Originally, the Backstage store-within-store format was designed to boost traffic and sales at underperforming full-line stores with lots of excess space. However, given the concept's success at driving traffic to Macy's brick-and-mortar stores, the company has widened its ambitions for its off-price banner.
Between April and June, the retailer will open Backstage shops within 37 more full-line stores, giving it Backstage outlets in 300 of its 446 full-line Macy's stores (plus eight standalone Backstage stores). This includes adding Backstage to the company's massive flagship stores in Manhattan and Chicago.
Macy's Backstage will join the company's iconic Manhattan flagship store in May. Image source: Macy's.
The current expansion round will also add Backstage shops to many of Macy's smaller full-line stores, those with roughly 150,000 square feet of space or less. Clearly, the retailer now sees value in carving out space for Backstage even in stores that don't have a lot of excess square footage.
In its recent announcement, Macy's also hinted that it plans to continue opening freestanding Backstage stores this year. However, the company didn't provide additional details.
Doubling down on what's working
Macy's made an amazing comeback in 2021, posting sales and earnings well ahead of 2019 levels in the final three quarters of the year. The strong performance of Macy's Backstage -- and the traffic the off-price outlets drove to full-line Macy's stores -- contributed in a big way to this turnaround.
The continued growth of Backstage in 2022 will help Macy's maintain its recent sales and earnings momentum. In particular, the off-price concept has proved that it can drive brick-and-mortar traffic more consistently than the company's traditional full-line business. Thus, adding Backstage to full-line stores can have a halo effect that lifts sales in other departments, too.
Based on its recent price of around $26, Macy's stock trades for just six times the company's projected earnings for fiscal 2022. The company also has a solid balance sheet and owns billions of dollars of real estate. These factors make Macy's a very intriguing value stock for investors with medium to high risk tolerance.
