On July 20, Macy's (M -1.40%) announced an acceleration in the growth of its off-mall, small-format stores. That's great news for the long-established retailer that was devastated at the early stages of the pandemic when it was forced to close its stores to in-person shopping.
Management can be commended for pivoting successfully, enhancing its digital business, which led to surging sales and profitability. Let's look at what this move could mean for investors and observe how much stronger Macy's business is compared to before the outbreak.
Macy's is in expansion mode
Macy's announcement said that it would open four new, small-format locations in 2022. It's a surprising shift considering that, for years, Macy's had been decreasing its physical footprint as consumers shopped online more often. However, this move isn't a complete reversal of that strategy. Instead, Macy's is adapting to consumer behavior effectively. These off-mall locations will cost Macy's less money to operate (lower rent and fewer employees).
At the same time, it allows Macy's to stay in markets it would otherwise have to leave entirely if it stuck with the big-store format. Interestingly, Macy's found that online sales at its website were higher in markets where it has a physical presence. One of the customer pain points in shopping for clothing online is if something doesn't fit well, the return process is a hassle. That can explain why online sales are higher where Macy's has a physical presence. Customers are more confident purchasing online, knowing that if they need to make a return, they can zip on over to the nearby Macy's location.
Of course, online sales jumped at the pandemic's onset when physical stores were closed. Surprisingly, digital sales have remained elevated at Macy's. In its most recent quarter, which ended on April 30, digital sales were 34% higher than in the comparable quarter in 2019 and comprised 33% of its overall sales.
Therein lies another benefit of having physical locations near customers; it gives Macy's the flexibility to offer customers the option to buy online and pick up the item in a store. That can be an incredibly lucrative transaction as it removes the expense of shipping the item to the customer's home and brings customers inside a store where they might make impulse purchases.
Macy's is more vital than ever.
Overall, the changing business dynamics of the pandemic have made Macy's a stronger business. Macy's sales increased by 39.8% to $25.3 billion in its most recently completed fiscal year. More impressively, operating results went from a $956 million loss a year ago to a $2.3 billion profit, its highest mark on the metric going back to 2015. It's all excellent news for Macy's stock.
Not too long ago, Macy's was flailing, with revenue falling for three straight years in 2016, 2017, and 2018. Management hesitated to develop its online business for fear it would cannibalize in-store sales. The pandemic was a blessing in disguise that forced it to create an online business that is now thriving -- reversing it from a business that was shrinking into expansion mode.