Macy’s (M) is getting closer to a key new way to attract new shoppers: it’s set to pilot a chain of ‘off-price’ discount stores.
The department store chain had said in January it was looking into to open a chain of stores that will pit it against the likes of TJX’s (TJX) Marshalls and T.J. Maxx stores. On Tuesday, CFO Karen Hoguet was parsimonious with details, but nonetheless gave some new details on the off-price chain, which still has no launch date.
Off-price is an area of retail that has boomed as shoppers gravitate toward designer brands at big discounts to department store prices. Outlets and off-price chains first emerged for clearing out unsold merchandise from earlier in the season or products with defects. But now, the bulk of what is sold is no longer close-outs. Instead, much is made to order for the off-price and outlet stores. For instance, some 90% of what Neiman Marcus’ Last Call outlets chain sells is made specifically for those stores.
A T.J. Maxx or a Marshalls sells a far wider array of brands than a Neiman Marcus Last Call or a Nordstrom Rack (JWN) , which are really discount versions of their sister companies. Macy’s sister chain, Bloomingdale’s also has a horse in the off-price race: although Bloomingdale’s got off to a slower start than Saks or Nordstrom, it now has 13 outlets versus 37 full service department stores.
It is largely for that reason that Macy’s off-price is more likely to be like a T.J. Maxx than a department store’s outlet, Hoguet said.
“Obviously in the outlet world, we have Bloomingdale’s, so there’s no reason to create a Macy’s, because we’re also expanding the Bloomingdale’s outlet concept. So we didn’t want the competition between the two directly,” Hoguet told analysts on a conference call.
And the competition will in any case be fierce. TJX has expanded to 2,000 U.S. stores at last count from 1,600 five years ago while regularly beating other major retailers, including Macy’s, in terms of sales growth. Among department store competitors, companies have gotten aggressive: upscale retailer Nordstrom has tripled the number of its Rack stores in the past five years – it has some 154 now – and plans to have 300 by 2020.
Hoguet recognized the risk of cannibalization but said an off-price Macy’s would bring in a new customer, saying Bloomingdale’s Outlets has attracted customers who later graduate to the full-service, full price Bloomie’s.
“Instead of taking business away from the Bloomingdale’s stores, we actually brought new customers who learned, and got comfortable with Bloomingdale’s from the outlet experience,” she said. What’s more, Macy’s relationship with vendors will give it clout to get up and running quickly and compete effectively.
Still, it is facing well established, yet fast-growing rivals. TJX’s sales have grown 50% in the last six years, and the retailer has become a favorite of vendors for the speed with which its pays them and can sell off its merchandise. (Please read Fortune‘s feature from last summer on TJX‘s explosive growth.) Macy’s also faces a risk of cannibalizing sales at its department stores if there is too much overlap in products.
The department store very much needs new sources of growth: the company gave a disappointing profit forecast for the new fiscal year and only expects comparable sales to increase 2% in 2015. For the full year, Macy’s projected per-share earnings of $4.70 to $4.80, just missing the $4.84 analysts had expected, according to Thomson Reuters.