As Macy's shrinks its stores, CEO Jeff Gennette says this is what he will do with the extra space

  • Macy's is using four of its existing stores to test as "neighborhood" locations, where it will cut as much as a fifth of square footage.
  • CEO Jeff Gennette told CNBC the company could bring in other retailers, expand its Backstage locations or create mini-fulfillment centers with the extra space.
Jeff Gennette, CEO of Macy's.
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Jeff Gennette, CEO of Macy's.

Macy's is testing smaller stores to save money, leaving it with room to bring in new concepts.

The company said it's picked four of its existing stores to test as "neighborhood" locations, where it will cut as much as a fifth of square footage, thereby trimming excess inventory and staffing. CEO Jeff Gennette said Wednesday during a call with analysts that Macy's will look in 2019 to see what format works best before deciding what it will roll out to other stores across the U.S.

"We want to create a vibrant destination," Gennette told CNBC Wednesday after Macy's reported better-than-expected quarterly earnings. "When you look at what the customer needs, it's more about fulfillment and convenience. You need less space in order to do that."

Despite the earnings beat and an increased forecast, Macy's shares fell nearly 6 percent Wednesday. The stock is up about 35 percent so far this year.

In rethinking its real estate, there are three ways Macy's could fill the leftover space in its "neighborhood" stores, Gennette explained.

One way is by partnering with other retailers. Macy's already has brought Starbucks and Sunglass Hut into its stores, for example. Gennette said it will continue to look at food-and-beverage concepts and other retailers that don't cannibalize what Macy's is currently selling. This mimics a similar initiative taken by Kohl's, which is dividing some of its bigger stores to make space for retailers such as Aldi.

The CEO added that other retailers could include those currently trying out Macy's recently launched pop-up marketplaces, which are in a handful of cities today. "You could turn that [excess space] over to a suite of retailers," he said.

Then, Macy's will consider bringing its off-price concept, known as Macy's Backstage — a competitor with the likes of TJ Maxx and Nordstrom Rack — to move into the space, Gennette said. The company has said its full-price locations with Backstage shops inside them are helping lift sales. Macy's currently has 166 Backstage locations open across the U.S., and continues to add more.

Last, Macy's could use the extra space to fill online orders, like a mini-fulfillment center, according to Gennette. He said one location in a market could be used to reach surrounding homes, and even other Macy's stores. Nordstrom, similarly, is trying a small-shop concept known as Nordstrom Local in Los Angeles, where it can pull inventory from other surrounding shops and serve as a hub for online orders.

"We will test and iterate until we land on the right formula to scale," Gennette told analysts Wednesday.