M Stock Doesn’t Look Any Better Despite Discount Push

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Macy’s, Inc. (NYSE:M) wants to become a discount retailer.

macy's, m, macy's stock, m stockThe company is launching Macy’s Backstage, an off-price version of its more upscale department stores, starting in the New York metro area this fall.

M stock, just like about any retail investment, is sensitive to same-store sales, and Macy’s is betting results will grow as a result of the expansion.

It’s not surprising that Macy’s would seek to grab some of the discount retail share with Macy’s Backstage. After all, its own same-store sales have lagged, particular in comparison to its new off-price peers, and M stock has been a disappointment.

Doesn’t Macy’s realize discount retail is already standing-room only? Macy’s is pitting itself against traditional off-price retailers — TJX Companies (TJX), Kohl’s (KSS) and Target (TGT), to name a few — while also going head-to-head with Nordstrom (JWN) and Saks Inc outlets.

Instead of potentially stealing share from its competitors, did Macy’s just shoot itself in the foot? Let’s take a look at the latest initiative and what it means for M stock.

Backstage Pass?

Macy’s Backstage is basically a clearance rack filled with merchandise from the retailer’s traditional department stores. It’s not a new concept, as Nordstrom similarly sells its overlooked items at its Nordstrom Rack stores — all 178 of them.

Where’s the innovation?

Macy’s isn’t going full-throttle with its outlet stores yet. The launch involves a handful of pilot locations so the company can “test and learn to see what resonates most with customers so we can adjust before rolling out additional locations,” according to the press release.

The problem is that Macy’s same-store sales have been on a downward trend, including the most recent quarter in which comp sales for company-owned and licensed locations fell 0.1%. According to Retail Metrics data, Macy’s comparable sales have trailed its off-price rivals — including TJX, Ross Stores (ROST) and Burlington Stores (BURL) — for three of the past four quarters.

The company is clearly hoping that these off-price stores will drive higher traffic, bolster comp sales results and help M stock. To do that, Macy’s will need to take share from other discount retail stores, which may be possible while the novelty factor is still in play.

But Macy’s is running the risk of cannibalizing its own sales, even though management insists this won’t happen.

Macy’s stores are known for their sales, not in the way that JCPenney (JCP), mind you, but it’s not too difficult to walk out of a Macy’s store having saved 30% through some means. Macy’s Backstage won’t offer those same promotional activities, so shoppers with sales and coupons in their DNA may prefer to stick with the original Macy’s (which supports the no-cannibalization argument).

And, to the company’s credit, shoppers won’t be completely denied the chance for coupons and promotions; they’ll just have to visit the original to find them. But other shoppers who aren’t as promotion driven will know pretty quickly whether Macy’s Backstage or the original stores are more their style.

This leaves the new customer, which Macy’s no doubt is trying to attract. But if these customers weren’t flocking to Macy’s merchandise before, what makes the retailer think they will do so for its new Backstage concept? Macy’s is likely depending heavily on those “special” buys, and only time will tell if shoppers are as intrigued as the retailer seems to be.

Shareholder Value

M stock has left a lot to be desired this year, evidenced by the market-matching 2% returns for the year-to-date. At least the stock also has a 2.1% dividend yield to add to the returns.

The results would likely have been worse were it not for a rising dividend and ongoing share repurchases. In the first quarter, the company lifted its dividend by 15% — marking the fifth such increase in four years — and increased its share-buyback authorization by $1.5 billion. Clearly Macy’s is trying to resuscitate an otherwise flatlining stock.

Final Take

Macy’s Backstage is the product of months of collaboration, but it isn’t really offering consumers anything different. If anything, it gives existing customers another location at which to find the same merchandise.

Macy’s is lacking innovation, and until it improves on that front, M stock isn’t offering investors anything new, either. Investors should stay away until Macy’s can show a clear catalyst for sales growth.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/06/m-stock-macys-backstage/.

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