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Macy’s mulls taking on T.J. Maxx, Nordstrom Rack in “off-price” wars

January 9, 2015, 12:32 AM UTC
Shoppers Flock To Post-Christmas Sales
NEW YORK, NY - DECEMBER 26: People wait to cross the street after shopping at Macy's department store on December 26, 2012 in New York City. Shoppers flooded Manhattan stores for post-Christmas deals throughout the day. (Photo by Andrew Burton/Getty Images)
Photograph by Andrew Burton — Getty Images

Macy’s is exploring one of the fastest growing areas of retail: outlets and “off-price” stores.

The department store giant said Tuesday that it is considering creating a discount chain, which would pit it against the likes of TJX’s (TJX) T.J. Maxx and Nordstrom’s (JWN) Rack outlet stores.

Yet it’s easy to see why Macy’s would be tempted. Such a move could give Macy’s a slice of an area of retail that has boomed as shoppers gravitate toward designer brands at big discounts to department store prices.

It’s not unusual to find a Michael Kors (KORS) handbag at T.J. Maxx go for a fraction of the price it would at the full-service Kors store, for example. The potential for good deals has translated into huge foot traffic and financial success for TJX, which also operates Marshalls. The company 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.

Rival department stores have also gotten in on the off-price action. Upscale retailer Nordstrom has tripled the number of its Rack stores in the past five years – it has 167 now – while keeping the number of its namesake department stores steady at around 118.

Meanwhile, Saks Fifth Avenue has closed a quarter of its department stores since 2009, even as it has aggressively opened new Off Fifth outlet stores. The outlet stores consistently beat their department store siblings in terms of sales growth.

Even Macy’s sister chain, Bloomingdale’s 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.

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.

Still, if Macy’s goes down this road, it will face formidable competition. 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.

Separately, Macy’s said Thursday that comparable sales rose 2.1% during November and December, falling a bit short of Wall Street analyst expectations and sending shares down 3% in after-hours trading. The company also announced it was closing 14 of its 790 stores, but that it has seven new ones in the works. The announcement came on the heels of rival J.C. Penney (JCP) saying it would close 39 stores.