Macy's bets off-price stores within stores will drive traffic

By Sruthi Ramakrishnan

(Reuters) - Macy's Inc <M.N> plans to open Backstage off-price stores within some existing Macy's, betting that the benefit of bringing new customers into stores outweighs the risk of diluting the company brand and undercutting sales of full-price items.

Macy's on Tuesday reported a drop in quarterly sales that was less than feared and said it plans to open Backstage stores within 15 Macy's this year. It will add one more standalone Backstage store this year to the five it has opened since September.

Macy's Chief Financial Officer Karen Hoguet said the new Backstage brand would test entry into the booming market for discount stores, which offer up to 80 percent off regular prices.

Standalone Backstage stores created so far have not undercut, or cannibalized, sales at nearby Macy's, she said, adding that the new plan could do so.

"When you open it in-store, the capital is less, but then there is also more cannibalization of the existing store," she said on a conference call with analysts following the earnings release.

But the Backstages will pull customers into Macy's, she said. "We believe this could be an exciting way to drive traffic to our Macy doors, and to offer some price points and categories - for example, home decor or baby gear, toys, et cetera - that we don't currently carry at Macy's."

Some analysts said, however, that Macy's risked muddying its brand and undermining sales of full-price items.

Neil Saunders, chief executive of research firm Conlumino, said the move could be "quite dangerous," undermining Macy's efforts to sell at full price.

"Macy's is very unclear about where it wants to go, what kind of brand image it wants to project," Saunders said.

Macy's offers more discounts than chains such as Nordstrom Inc <JWN.N>, which will make it more difficult to distinguish Macy's from Backstage, said Morningstar analyst Bridget Weishaar.

Macy's does not break out sales for the Backstage business but said it was "in the very early test stages."

Operating a low-margin business within Macy's stores, which are often in high-rent areas, could also be expensive, analysts warned.

"If you look at a TJX <TJX.N> or a Ross <ROST.O>, the model works because they put the stores in cheaper real estate areas," Weishaar said.

However, putting Backstage in less productive Macy's stores, could help boost traffic there, said Dan Hess, chief analyst at research firm Merchant Forecast.

(Reporting by Sruthi Ramakrishnan in Bengaluru; Editing by Steve Orlofsky)