Here’s the Secret to Beating Amazon in the Retail Wars

Macy’s (NYSE:M) is finally escaping retail purgatory.

The iconic department store beat earnings and revenue estimates and has slowed its declining same-store sales. Its cost-cutting efforts are finally working as management appears to be setting the company up for a steady recovery after absorbing blow after blow from Amazon.com.

As the brick and mortar retail wars escalate, Macy’s looks like a potential survivor. Once lumped in with J.C. Penney (NYSE:JCP) and Sears Holdings (NASDAQ:SHLD), Macy’s has successfully closed underperforming stores and cut costs to compete in the new retail landscape.

More importantly, the chain is embracing a new identity.

“Macy’s is morphing into a discount store,” Business Insider declares.

Part of Macy’s turnaround is credited to the expansion of Backstage, the store’s discount department that operates like Nordstrom Rack. The company plans to expand to 100 new Backstage locations this year as the discount locations helped account for Macy’s first same-store sales increase in three years.

It’s a smart move. Instead of going more upscale to try and compete with the fancier boutiques, Macy’s is now emulating the discount model that has served Kohl’s Corp. (NYSE: KSS) and TJX Cos. (NYSE:TJX) so well.

You probably recognize TJX as the parent company of T.J. Maxx and Marshalls. The chain’s strategy of constantly changing inventory in its stores allows TJX to attract foot traffic from bargain hunters that it needs to compete with the online shopping crowd. Its an experience Amazon has yet to duplicate, helping the chain of extreme discount chains report impressive sales gains in 2017.

Macy’s shrewd move to expand its discount offerings comes as Amazon continues to gut the “middle road” retailers. You know the drill. The glory days of the department store are over. Amazon has crushed the old-school mall stores like Sears and J.C. Penney that were once known for selling everything from blenders and bedsheets to jeans and designer clothes.

The all-in-one brick and mortar department stores just couldn’t compete with an online superstore’s inventory or price. To survive as a retail business in the age of Amazon, you need a niche. Spoiler alert: a generic department store isn’t niche.

If you’re going to try to sell a variety of goods, you better bring the hefty discounts to get bodies in your store. Shoppers have proven they’re willing to leave their homes for a good deal. It’s that simple.

That’s why we’ve been bulled up on popular discounters like Dollar General Corp. (NYSE:DG) and Five Below Inc. (NASDAQ:FIVE). These two chains serve very different customers. Dollar General goes after a lower income, more rural crowd. Meanwhile, Five Below goes after a younger demographic and is more of an “upscale” version of a dollar store. Both stocks have gained more than 30% over the past six months (We booked gains of more than 35% on FIVE back in January).

I’ve said it many times before, but it bears repeating. It’s easy to get swept up in the “retail apocalypse” market story. Unfortunately, following the media-driven narrative won’t make you any money. The best retail operations will adapt and survive despite Amazon’s growth and dominance. The trick that the discounters have utilized is to offer goods and experiences that are out of Amazon’s reach.

During last month’s melt-up rally, we noted how the SPDR S&P Retail ETF (NYSE:XRT) was back on track and even outperforming the red-hot Nasdaq Composite. At the time, beleaguered retail names were helping lead the charge higher.

We’re not seeing the same strength after the February pullback. XRT is now flat on the year, while the S&P 500 is up more than 2.6%. That means we’re going to have to be choosy when it comes to picking our retail comeback plays.

Despite yesterday’s fade off its highs, I still like Macy’s if it can bounce from these levels. The stock isn’t even back to its 2017 highs, so there’s still plenty of room to run. Macy’s and other department stores might be toast in the long run. But price is telling us the stock could enjoy an extended comeback move from these levels.

Sincerely,

Greg Guenthner
for The Daily Reckoning

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Greg Guenthner

Greg Guenthner, CMT, is the editor of The Rude Awakening Pro, The Seven Figure Formula and Profit Spy. Over the past decade, Greg has helped build the small-cap and technical research teams. His analysis has appeared in Forbes, Yahoo Finance, Bankrate, and countless other publications. Greg is a member of the CMT Association and holds the...

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