Department stores dying? Not Macy's

Don’t write off department stores just yet.

Traditional retailing may still be under pressure from online retailers like Amazon, but the results released Wednesday by Macy’s show there’s still plenty of hope as the sector evolves and transforms itself.

Macy’s experienced a sales surge at the start of the year as customers flocked to buy products ranging from perfume to hand bags, boosting the retailer’s profits and defying the low expectations of some industry observers.

Sales were up 4.2%in the first three months of the year, reversing a mostly downward trend that the retailer has experienced over the last four years.Macy’s net income was $139million in the first quarter, up from $78millionin the same quarter last year. The results handilybeatthe expectations of analysts surveyed byS & P Global Intelligence.

“We exceeded ourexpectations and saw strong performance across all three brandsMacys, Bloomingdales, and Bluemercury,” Jeff Gennette, Macys, Inc. chairman
and CEO, said in a statement. “These positive factors give us confidence to raise both our sales and earnings guidance for the fiscal year.

For decades, Macy’s wasthe standard bearer forthe elegant department store, but it has been struggling to reinvent itself in an era when convenience is king, and customers are increasingly content to tap a keyboard and have shoes, purses, and clothing brought to their front door.

The retailer has pared stores and slashed thousands of jobs as it struggles to boost profits. But some industry watchers have fretted that’s not enough. In a note to investors last week, Morgan Stanley said that given the store chain’s lackluster sales, itmightneedto shutter even more failing locations, and at a faster pace.

“Even though Macy’s is closing stores proactively, it may not be doing so quickly enough,” the note said. Morgan Stanley added that it was downgrading the retailer to “underweight, as the risk/reward now skews to the downside.”

Overall sales are predicted by management to be flat or slightly down this year.

Macy’s is succeeding by playing to the basics, like its loyalty program.

The retailer’s new Star Reward loyalty program is paying off, with its highest level members spending more. And last week, the program began including customers even if they did not have or use a Macy’s credit card.

Macy’s Backstage, the retailer’s off-price concept that sees especially brisk sales in the shoe and home categories, continues to expand. With the goal of opening roughly 100 more locations this year, the retailer unveiled 18 new stores in the first three months of 2018, and plans to launch roughly 40 more in the second quarter.

Macy’s is also aiming to better compete with Amazon, as well as its traditional retail peers, by bringing technology to its aisles, and trying to make the in-store experience as much of a draw for customers as the clothing and accessories lining the racks and shelves.

By the end of this year, shoppers at all Macy’s stores will be able to use their smartphones to scan and pay for most products with the store’s app.

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It’s also rolling outan augmented-reality furniture shopping featurethat will enable customers to picture couches and other pieces of furniture inside their actual homes–an experience slated to be available at 60 locations by the fall. An augmented-realityfeature is also being made available on the mobile app.

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Retailer Macy's plans to offer a virtual reality furniture shopping experience in 60 stores by this fall.

The company also recently bought Story, a Manhattan shop that regularly rotates its look and merchandise, similar to the changing exhibitions at an art gallery or features in amagazine. And Macy’s has brought Story’s founder and CEO onto its leadership team to improve the in-store experience for shoppers.

“We’re in the experience business,” Gennette said in an earnings call with investors Wednesday, in which he also noted thatthis is the most competitive retail environment that Ive ever seen.

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Neil Saunders, managing director of retail consultancy GlobalData, said in a note that Macy’s sales uplifts are particularly impressive, and praised various steps taken by the retailer, including better monitoring of its amount of merchandise, and a focuson its e-commerce business as well as stores.

But Saunders cautioned that a popular promotion that helped drive sales in the last quarter will be in the rear view mirror in coming months. Competition among retailers remains fierce, and there are other headwinds that could slow the store chain’s growth.

“Taken in concert,” he wrote “this suggests that performance may well deteriorate.