Macy's is opening some more off-mall, small-format stores this year, saying it will accelerate that rollout in 2024 depending on the performance of those sites, as it joins a growing group of retailers leaving large regional shopping meccas.

The New York-based parent of its namesake Macy's department store chain as well as Bloomingdale's and Bluemercury said Thursday it plans to debut four Market by Macy's, as well as a Bloomie's in 2023 slated for Seattle. Macy's now has eight Market by Macy's, stores one-fifth the size of the chain's flagships, and two Bloomie's, a pint-sized version of its luxury brick-and-mortar sites. Those locations — offering a smaller but curated selection of merchandise — are doing well, according to Macy's CEO Jeff Gennette.

"And if new locations continue to outperform, we will look to incrementally accelerate off-mall openings beginning in 2024. ... And by the end of the year, we are hoping for a scalable model,” Gennette said during a call to discuss its fourth-quarter earnings.

Macy's has found that having a physical presence in a market, and these off-market, small-format stores, "play an integral role in supporting our omnichannel ecosystem,” the CEO said.

Other retailers, like Macy's, are looking to pare down their presence in large malls and reposition store fleets. Columbus, Ohio-based Bath & Body Works is "aggressively moving" in the same direction, and late last month said it would be opening 90 new off-mall stores while closing 50 mall locations this year, Brandon Svec, national director of U.S. retail analytics for CoStar Group, said in an email.

"A little different footprint [from Macy's] obviously so the magnitude of space impacted is lower, but still very noteworthy," Svec said.

New York-based Foot Locker has said it wants to expand outside of malls, and Victoria’s Secret, headquartered in Columbus, Ohio, tested an off-mall format a couple of years back, Neil Saunders, managing director of GlobalData, said in a email to CoStar News. Sephora, based in San Francisco, is a mall staple that is now opening up beauty-goods shops within Kohl's stores, which are not in malls.

Most of Macy's small-format stores may not be in malls, but they are not standalone properties. They generally are in shopping centers, which have advantages over malls, according to Anjee Solanki, U.S. national director of retail for real estate firm Colliers.

"Retailers have been seeking alternatives to mall strategy over the past few years and are opening more stores in grocery-pharmacy-anchored, lifestyle and ethnically dominant shopping centers in an effort to attract more regular customers and repeat business — those who are less interested in browsing the store and instead want to get in and out as quickly as possible," Solanki said in an email. He added that "parking in non-mall projects often allows for easier access to stores than vast mall parking lots/garages."

Gennette in fact told Wall Street analysts that Market by Macy's gets a lift from some of its neighbors.

"Thus far we are most successful in centers that include high-traffic concepts like off-price or grocery, where arguably products and brands provide a differentiated option," he said. "When opening in existing markets cannibalization is lower than anticipated and new-customer acquisition rates are higher than on-mall.”

Off-mall stores are getting 2 ½ times more visits than mall stores, Gennette said, citing data from Placer.ai.

And the Market by Macy's and Bloomie's are doing well so far.

“These average about 30,000 to 40,000 square feet, or roughly one-fifth the size of our on-mall locations," Gennette said. "Looking at the five Market by Macy's and the one Bloomie's that have been open for over a year, fourth-quarter comparable-owned-plus-licensed sales increased by 8% and 12%, respectively."

That stands in stark contrast to how the rest of Macy's chains performed in the quarter ended Jan. 28. Overall, net sales were $8.3 billion, down 4.6% versus the fourth quarter of 2021. Macy's saw comparable sales for its banner store decline 3.3%, while Bloomingdale's were up less than 1%. A number of retailers, including Kohl's, have reported tough fourth quarters and have warned that consumers will continue to be financially constrained this year, an alarm that Gennette also sounded.

In its investor presentation, Macy's said the off-mall, small-format stores are meant for so-called infill locations where the company already has a store presence but sees an opportunity to gain more foot traffic and a new customer base within the market. They are also replacement locations for markets where underperforming big-box location closures would result in a market exit and are in markets where the company hasn’t had a store presence before.

"Directionally, opening smaller stores is sensible as it puts Macy’s where the stronger demand is and allows them to expand without the capital expense of opening huge new stores," Saunders said. "That said, the pace of expansion is pretty low so the smaller formats don’t have all that much of an impact. The other issue is that Macy’s still doesn’t seem to have figured out what really works for them in small formats. The smaller stores are often better than their larger counterparts, but they still lack any real oomph and pizzazz. Standards need to be improved if they are to work better."

Bill Read, an executive vice president at Retail Specialists, in an email to CoStar News, said Macy's will have to rev it up for off-mall stores to boost it financially.

"The pace of the rollout seems painfully slow and cannot be a major contributor to the bottom line till they can achieve scale with a much larger store footprint for Market by Macy's," Read said. "Only four stores in 2023 tells me their still refining the store concept and not ready to roll it out on a larger scale. At the same time, their competitors are on massive expansion plans and they will be simply playing catch-up."

On Thursday, Gennette also said Macy's is studying its portfolio after pulling back from plans, unveiled three years ago, to shutter 125 stores. The retailer has previously said it was going to delay some of those closing after learning that having a physical presence in a market helps drive online sales in that area. Macy's three chains have 722 locations.

"We are currently reevaluating the right number and mix of both mall and off-mall locations," Gennette said. "Our ecosystem and customer are dramatically different today than when we announced our 125 Macy’s closure plan in February of 2020. Since then, we have closed approximately 80 Macy's locations and plan to close another five this fiscal year. We have shuttered our most significant underperformers, exited dying centers and improved the existing store experience while delaying closures of others that are cash-flow positive.”

Three Market by Macy's opened in fiscal year 2022. In 2020, the first one debuted in the Dallas-Fort Worth area of Texas at Southlake. Other locations now include Presidential Markets, South Point and Creek Town Center in greater Atlanta; WestBend and Highlands at Flower Mound in Dallas-Fort Worth; and in the St. Louis area. The first Bloomie's opened in August 2021 in Fairfax, Virginia, and there is also now one in Skokie, Illinois. It is actually located at a mall, Westfield Old Orchard. The new Bloomie's this year will be in Seattle.

These small-format stores allow Macy's to more easily expand its physical footprint and give its stores a local flavor, according to Solanki.

"The off-mall stores are smaller and offer fewer products and services, albeit ones that are catered more towards customers in that particular neighborhood, allowing the retailer to customize product offering," Solanki said. "This strategy can also provide additional channels for product pick-up, i.e., curbside pick-up which is easier to accomplish in smaller shopping centers. ... [And] this strategy provides retailers with a more localized approach to reaching consumers."