We went to Macy's and saw why the brand might be headed the way of Sears

Incoming Macy's CEO's goals

Macy's in New York City is an iconic destination.

But a recent visit to the Herald Square store shows the magic appears to have been lost.

Walk past the licensed sections that are operated by their companies, like beloved cosmetics brands MAC and SK-II, and premiere brands that encase their handbags behind glass, like Gucci and Louis Vuitton, and ascend the escalators.

You'll see disarray, you'll see ample discounts, and you might smell a faint whiff of foul yogurt if you walk past the kids' section.

And it's not just Herald Square. The company as a whole is ailing.

Sales have been down for five quarters in a row. For the first quarter of fiscal 2016, sales were down 7.4%. The company has openly discussed that foot traffic has been falling.

"The number of transactions declined 7% in the quarter, which is far worse than what was experienced last year," CFO Karen Hoguet said on a recent earnings call.

Macy's has been trying to figure out how to get people back into stores — but its tactics might be the risk the reputation it may be trying to resuscitate.

Obviously, the easy way to bring back foot traffic is to lure consumers with sales. It's a trick that's been employed by many of Macy's peers in the mall. Nordstrom, arguably the more prestigious department store of the two, has even admitted that discounts aren't attractive to its consumers.

Macy's flagship Herald Square store:

Macy's flagship Herald Square store
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Macy's flagship Herald Square store
Pedestrians walk through Herald Square past a Macy's Inc. department store in New York, U.S., on Monday, August 10, 2015. Macy's Inc., the largest U.S. department-store company, is scheduled to report second-quarter earnings before the opening of U.S. financial markets on August 12. Photographer: Michael Nagle/Bloomberg via Getty Images
Photograph shows a corner view of the 1924 addition to the Macy's department store building on 34th Street at Herald Square in Manhattan, New York, 1930s. (Photo by FPG/Getty Images)
397655 01: Shoppers make their way across Herald Square near Macy's department store November 23, 2001 in New York City. The Christmas shopping season started kicked off in the United States the day after Thanksgiving, one of the busiest shopping days of the year. (Photo by Chris Hondros/Getty Images)
NEW YORK - NOVEMBER 22: A holiday scene is depicted in a Macy's at Herald Square department store window during the unveiling of the retailer's holiday windows November 22, 2002 in New York City. (Photo by Matthew Peyton/Getty Images)
NEW YORK - FEBRUARY 28: The Macy's Herald Square entrance is seen February 28, 2005 in New York City. Federated Department Stores Inc. is buying rival May Department Stores Co. for $11 billion in cash and stock in a deal that would enable them to compete against Wal-Mart Stores Inc. as well as upscale retailers. (Photo by Stephen Chernin/Getty Images)
UNITED STATES - AUGUST 15: Pedestrians and shoppers pass by the Macy's flagship store at Herald Square in New York, Wednesday, Aug. 15, 2007. Macy's Inc., the second-largest department-store chain, reported quarterly profit that exceeded analysts' estimates because of reduced advertising and retirement costs. (Photo by Michael Nagle/Bloomberg via Getty Images)
UNITED STATES - AUGUST 15: Pedestrians and shoppers pass by the Macy's flagship store at Herald Square in New York, Wednesday, Aug. 15, 2007. Macy's Inc., the second-largest department-store chain, reported quarterly profit that exceeded analysts' estimates because of reduced advertising and retirement costs. (Photo by Michael Nagle/Bloomberg via Getty Images)
NEW YORK - NOVEMBER 05: The New Year's Eve Ball, which will be seen by millions as it descends above Times Square to ring in 2009, is displayed at the Macy's Store in Herald Square November 5, 2008 in New York City. The Waterford Crystal ball is comprised of 672 crystal triangles and is themed 'Let There Be Light.' (Photo by Jeff Zelevansky/Getty Images)
Shoppers look at shirts at Macy's Herald Square department store in New York, U.S., on Friday, Nov. 27, 2009. Shoppers gathered at Best Buy Co., Target Corp. and Toys 'R' Us Inc. stores from New Jersey to Texas well before midnight yesterday to take advantage of Black Friday deals on televisions, laptops and robot hamsters. Photographer: Jin Lee/Bloomberg via Getty Images ***
Pedestrians walk past Macy's department store at Herald Square in New York, U.S., on Tuesday, April 6, 2010. March sales at U.S. retailers probably jumped almost three times as much as previously anticipated, as the early Easter holiday, warm weather and an improved job market boosted consumer spending. Photographer: Jin Lee/Bloomberg via Getty Images

"Where we're seeing a big miss is in our clearance and promo — promotional business. So what we take away from that is, number one, the clearance and promotional environment is really noisy," copresident Erik Nordstrom said on an earnings call in May. "There's a lot of excess product out in the marketplace. It's certainly easy to shop online. There's some heavy, heavy discounting going on. And we're seeing that effect in our business."

Nordstrom, however, has found a (semi) saving grace: its off-price business.

The company's Rack stores have been its quiet success story. Though the fact that its Rack stores out number those of Nordstrom — there are 200 Rack stores in the United States, compared to 118 full-line stores in the country — and the company has plans to have 300 by 2020. thereby undercutting ordstrom' reputation as a premiere retailer, the company can at least report that comparable sales for its entire off-price business was up 4.6% in the most recent quarter.

The company reported negative comparable sales (4.3%) for its full price business.

Obviously, there's hope in the off-price business, so it shouldn't be too surprising that Macy's has wanted to get in on the game, especially at a time when consumers are spending less on apparel and young shoppers are prone to shop at cheap, fast fashion stores. The company announced that it would shutter 40 locations in 2016, and the company is also creating off-price standalone stores called Backstage.

But that might take too long — so enter in-store Backstage locations, which are serving as "pilots," as the company called them in a first quarter earnings press release. As of the end of the first quarter, there were six already open within pre-existing stores.

But even before that, the company launched new in-store clearance sections called Last Act, an ominous name of sorts, as though to suggest that should all not go well, Macy's would be taking its bow. (Though, it would be fitting if its next effort is called Macy's Encore; at least that suggests that people want more.)

According to Macy's Testing and Learning page, it was intended to serve as a way to research Macy's Backstage, and a way to test out a new pricing structure. It turns out it was successful, as every single Macy's now has a Last Act section.

Struggling department stores you're familiar with:

Struggling department stores of 2016
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Struggling department stores of 2016
TORONTO, ONTARIO, CANADA - 2016/03/08: Sears store entrance, is an American chain of department stores. Known for selling high quality clothing article from shoes to shirts. (Photo by Roberto Machado Noa/LightRocket via Getty Images)
Macy's Inc. signage is displayed at a department store in New York, U.S., on Monday, Feb. 22, 2016. Macy's Inc., the largest U.S. department-store company, is scheduled to report fourth-quarter 2015 earnings before the opening of U.S. financial markets on February 23. Photographer: Michael Nagle/Bloomberg via Getty Images
J.C. Penney Co. signage is displayed outside of a store at the Gateway Shopping Center in the Brooklyn borough of New York, U.S., on Saturday, Aug. 8, 2015. J.C. Penney Co. is scheduled to release earnings figures on Aug. 14. Photographer: Michael Nagle/Bloomberg via Getty Images
UNITED STATES - JUNE 09: Customers enter the Dillards department store at Parkdale Mall, in Beaumont, Texas, Wednesday morning, June 9, 2004. A judge declared a mistrial in a lawsuit brought against Dillard's Inc. by 17 black shoppers in Texas who claimed that security guards at the department store chain harassed them because of their race. (Photo by Scott Eslinger/Bloomberg via Getty Images)
MIAMI, FL - APRIL 19: A Nordstrom sign is seen outside a store on April 19, 2016 in Miami, Florida. Nordstrom on Monday said in a cost-cutting measure they are expecting to lay off 350 to 400 people. (Photo by Joe Raedle/Getty Images)
The sign outside the Kmart store is seen in Broomfield, Colorado November 19, 2009. Sears Holdings Corp posted a narrower-than-expected quarterly loss November 19, 2009, helped by the first increase in same-store sales at its Kmart unit in four years. REUTERS/Rick Wilking (UNITED STATES BUSINESS)

This is, though, for better or for worse.

This was a a quick for Macy's to get into discounting game, and a way to capitalize on the off-price business, use excess store space, and course correct inventory problems. In theory, that made it a good move.

"It was genius at the time because, clearly Macy's [was] s coming out of a really bad ... holiday season," Gabriella Santaniello, analyst and founder of A Line Partners, told Business Insider.

But there are two crucial problems: one, Santaniello says that the clearance market is incredibly crowded as it stands.

And two: they're unsightly, and send a mixed message for a company that's supposedly trying to repair its image.

"I think Last Act was a genius short-term fix, but I think long term, they're going to have to have to reassess. But that's not who they [are]," she said.

"They're going to have to decide who they want to be," she said.

Santaniello points to an updated location in Columbus Ohio, one that's been fixed to make shopping a more upscale, pleasant experience. In these nicer stores, she says, Last Acts do not fly. In lower-tier stores, though, they could be at home.

Should Macy's decide to pull Last Act sections, though, she says that they can be excised easily given the fact that they're simply sections placed inside existing stores. The same can be said for in-store Backstage stores; they're easier to pull cut than an entire standalone stone should they ultimately fail.

So this tactic — while displaying some ingenuity — is proof that the off-price business isn't a foolish one; it's just that Macy's execution may be faltering in the eyes of some consumers. Some experts believe that standalone stores with discounts could fare better, but time will tell how Backstage stores perform.

"The off-price business is sensible if run as a stand alone entity, much the way Nordstrom run their Rack stores," Neil Saunders, CEO of consulting firm Conlumino, wrote in an email to Business Insider. "However, when put in mainstream department stores it undermines the whole proposition and gives the sense that Macy's is a discount business, which it isn't. In some ways the off-price business is an admission of failure: Macy's can't sell enough product at full price so it has to resort to discounting and off-price selling. However, the company should spend more time on fixing the problems that prevent them selling at full price rather than adding new bits to the business."

The comparison to Nordstrom is funny, given that Nordstrom is ailing, too.

"Nordstrom is suffering but Nordstrom is a much more pleasurable experience," Santaniello said. Consumers want more, she said, not just "discounting and think tis going to fly out the door" — something, arguably, that the cluttered Macy's is doing.

A walk through a Macy's store shows that there are problems that run deeper than Last Act.

"The two core problems are product and store environment," Saunders wrote. "On the product front, ranges are not differentiated enough and there is not enough newness in store or online. The assortment is also jumbled. You don't walk into Macy's and feel that the store is well curated with things you want to buy in each department; you walk in and find a very variable offer in terms of quality, design and style."

It's true — you could be in one Macy's and feel like it's occupied by several very different tenants, with varying levels of cleanliness. The wedding registry section is pristine, but the women's section is dismal. "The Mixing Room" – a section next to Last Act in Herald Square — blurs between the two sections.

Many — though not all — sections, even beyond Last Act, look haphazard with items strewn about.

"On the store front, many stores look shabby and under invested. They are not pleasant places to shop – something that's disastrous in an era when digital shopping is growing," Saunders wrote.

Macy's, though, has years of history embedded into it, and the announcement of new CEO Jeff Gennette — who will take over from current CEO Terry Lundgren in 2017 — serves a sign of potential promise.

"Macy's isn't a spent force but it is ill and needs radical surgery if it is to survive over the longer term. A new CEO can fix these things, but only with focus and determination," Saunders wrote. "Whether the business is prepared to make the necessary changes remains to be seen. If it doesn't start fixing its issues, however, the rot will firmly set in and it will go the way of Sears: a business not worth rescuing."

Macy's is trying. The aforementioned store in Columbus, Ohio is a start, and in New York, the company's millennial One Below has been trying to make shopping more accessible for young people, with an Etsy store and grab-and-go makeup sections, with millennial friendly brands like MAC and Benefit.

The company is adding in-store Bluemercury makeup stores, and 22 locations will be open by the end of fiscal 2016. The company is also upgrading its jewelry department. CFO Hoguet has spoken to making the shopping more experiential, too, as though to capitalize on what millennials like to spend on...experiences.

But all the 'experiential' merchandise in the world still belies what the heart of a purchasable experience is: it needs to be something that would get people to get off their computers, because whether retailers like it or not, e-commerce is a very real threat, and recent Morgan Stanley research predicted would hold the majority of the apparel market share by 2020.

And though Macy's has blamed a myriad of problems — the weather, and more — for its slipping traffic, the way to lure people to get into stores would be to make shopping pleasant. That might not be as far fetched as, say, the Arcade in One Below. It might start simpler.

"A really nice clean updated bathroom makes a world of difference," Santaniello said.

NOW WATCH: Ralph Lauren's new fitting room has an interactive mirror that looks like something out of a sci-fi movie

See Also:

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The best items to buy at Sears
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