Dive Brief:

• Macy's is pausing its plan to close 125 stores, announced last year as part of its Polaris turnaround, telling analysts Thursday that physical locations have proven key to digital as well as brick-and-mortar sales.

• Following a tactic employed by Amazon, Nordstrom, Walmart and Target to varying degrees, Macy's on Thursday also said it will launch a third-party marketplace for Macy's and Bloomingdale's customers in the second half of next year.

• The announcements came as the department store reported third-quarter net sales rose 36.3% year over year and 5.2% from 2019 to $5.4 billion. Store comps, including leased-based sales, rose 35.6% and 8.7% against 2019. Net income reached $239 million from last year's $91 million loss, up from $2 million in net income two years ago.

Dive Insight:

Macy's is adding yet another sales format to its ecosystem, this time a "curated digital marketplace" that CEO Jeff Gennette said will allow the retailer to further its e-commerce expansion.

"We can grow digital efficiencies faster, we can generate more profitability, we can get more depth and breadth of assortment, and really, you know, address new brands and emerging trends for a customer who looks to us to be able to do that," he said about the marketplace during the company's conference call.

The third-party platform joins the company's still-morphing network of sales approaches. That includes three tiers of full-line stores: flagships like those in New York and San Francisco, "Growth150" stores (remodeled locations representing half of its revenue) and "neighborhood stores." Off-price Backstage, mostly found as spaces within Macy's locations, is also opening more stand-alone stores, and the company intends to expand its smaller, strip-center-based Market by Macy's and Bloomie's, executives reiterated Thursday.

While its Polaris strategy initially called for significantly downsizing its mall-based fleet, that's now under review as the department store uncovers stores' role in boosting digital sales. But that will only work if the stores are much better merchandised than they are now, according to GlobalData Managing Director Neil Saunders. Macy's owns a lot of its mall locations and likely enjoys favorable leases when they don't because of their importance as anchors, which is why they're financially stable "even as the business has declined," he said.

"It is very true that physical stores are important for omnichannel, both in terms of supporting fulfillment and amplifying the brand," he said by email. "However, to do justice to the brand, stores need to look good and be compelling. At present, I'd say that because of the state they're in a lot of shops damage the image of Macy's."

The department store's third quarter performance beat many analysts' expectations, though executives warned that could be because early holiday shopping pulled some seasonal sales into the period, which in turn could hurt fourth quarter results. Still, Macy's is underperforming compared to some rivals, including Dillard's and Target, during a comparable period. Saunders doesn't believe that its upcoming marketplace will help it catch up, calling it "one of the latest examples of Macy's misplaced thinking." 

"While there is nothing inherently wrong with the idea, it is hardly pioneering since every retailer is now adding marketplaces," Saunders said in emailed comments. "It is also laughable that Macy's talks of using the marketplace to expand choice in a curated way when one of the biggest current problems is its inability to create a compelling proposition out of its own disjointed and unfocussed assortment."

With U.S. consumer spending up as the pandemic has eased and economy improved — retail sales jumped over 11% year over year the last two months — retailers, including Macy's, are getting a lift. Should that subside, store closures may be back on the table, according to Saunders.

"Once we get into next year and margins and sales growth comes under more pressure – and Macy's likely reverts to weaker performance – they will likely look at stores through a more critical and less optimistic lens," he said.