Macy's off-price stores aren't hurting TJ Maxx - but they could be hurting Macy's, analysts say

Business Insider/Mary Hanbury

Macy's Backstage could cannibalize sales at Macy's, analysts say.

• TJ Maxx's parent company, TJX Companies, reported stronger-than-expected sales numbers in its second-quarter earnings on Tuesday.
• Analysts say that new competition in the off-price market, such as Macy's Backstage, is not impacting its sales.
• "Fortunately, we have found that Backstage is better at cannibalizing Macy's own sales than drawing sales away from TJX," Neil Saunders, managing director of GlobalData Retail, wrote in a note to investors on Tuesday.

Macy's is going all-in on off-price retail.

This year, the department store is expected to add its Backstage concept to 120 of its stores, bringing its total to 160 locations.

"This has been a good story for us," Macy's CEO Jeff Gennette said in a recent call with investors. "We are satisfied with our results ... it's clearly a strategy that is resonating with customers."

Gennette said the company is closely monitoring the 40 stores that added Backstage sections in 2016 and 2017 and has seen positive growth in Backstage here.

Despite this investment, it doesn't seem to be putting much of a dent in the sales of one its biggest competitors in the space, TJ Maxx, whose parent company TJX Companies reported a 6% increase in same-store sales for the second quarter of 2018, surpassing Wall Street's expectations and sending its share price soaring on Tuesday. Same-store sales at Marmaxx - TJ Maxx and Marshall's - were up 7% in the quarter.

"Fortunately, we have found that Backstage is better at cannibalizing Macy's own sales than drawing sales away from TJX," Neil Saunders, managing director of GlobalData Retail, wrote in a note to investors on Tuesday.

He continued: "Satisfaction with Macy's Backstage remains well below the ratings received by TJX. While we believe that the future growth of Backstage poses some risk, we do not see it as a major threat."

In July, GlobalData Retail surveyed nearly 3,000 consumers who had shopped at Macy's Backstage over the past year, asking them which store they had shopped at less as a result of spending more at Macy's Backstage.

The largest group - 39% of respondents - said Macy's. 10.3% and 7.9% people said they shopped less at TJ Maxx and Marshalls, respectively.

"We're still in the early innings of our Backstage expansion. We have approximately 110 locations, with more than half opened in 2018. We're finding that Backstage is additive - customers are making more trips and spending more in the total store," a spokesperson for Macy's said in a statement emailed to Business Insider.

While it makes sense that department stores like Macy's and Nordstrom would want to imitate this popular model, they have one major disadvantage while operating in the space. Their off-price stores have to co-exist with their full-price stores, which also offer discounted products, potentially leading to brand confusion for customers and vendors.

When Macy's announced it would be rolling out Backstage sections to its existing stores in 2016, former CFO Karen Hoguet assured investors that the new store model wouldn't cannibalize sales from its full-priced stores because it has a separate buying team and different vendors.

However, analysts were skeptical.

"The deck looks stacked against them," a group of Morgan Stanley analysts wrote in a note in May 2017.

The analysts wrote that off-price stores such as TJ Maxx have a structural advantage over department stores since they have a large vendor base that has been built up over decades, and some of the products sold at TJ Maxx are made specifically for the store by certain brands.

Macy's Backstage does have a separate buying team that sells a mix of products from new and existing vendors, both from the current and the last season. However, a spokesperson for the retailer confirmed in June that Backstage also sells a limited amount of overstock from its other full-price stores, potentially making it a confusing shopping experience for the customer.