Reference no: EM133339162

Case Study: Macy's Inc. said it is bringing outposts of Claire's, a fashion-and-accessories store, to 21 of its locations as the department-store operator bets bigger on the store-in-store concept.

Claire's has long been popular with girls in their tween and teenage years, and Macy's hopes that hosting these stores will bring more business from this demographic going into the holiday season .

The partnership is part of Macy's strategy for broadening its customer base and shaking up the traditional department-store model, executives said.

The move follows a rapid rollout of Toys "R" Us store-in-stores to all of the retailer's roughly 400 locations . The company has found that they drive foot traffic, bring in new customers and encourage browsing in other categories.

"We've found that customers shopping Toys 'R' Us are younger and more diverse than our Macy's customer and that 85% of them are cross-shopping," said Marc Mastronardi, chief stores officer.

Department stores have been losing market share for years as shoppers spend less time in malls and buy more online. Bringing in popular brands through store-in-store arrangements is a logical strategy for acquiring customers and boosting sales, said Ed Coury, managing director at RCS Real Estate Advisors.

"Department stores are still, I think, reinventing themselves, and this is part of that," Mr. Coury said. "Most department stores are oversized for what they carry today."

Kohl's Corp. is another department store leaning into the store-in-store model as it seeks to prop up flagging sales. The company has spent hundreds of millions of dollars building and stocking more than 600 Sephora locations since last year. Executives say Kohl's stores with the store-in-stores are outperforming its locations without the beauty chain.

For the smaller brands, joining with department stores allows them to try out different real-estate sizes and locations without committing to lengthy leases or shouldering the costs of building out their own stores.

Both Claire's and Toys "R" Us recently emerged from bankruptcy , and this store-in-store strategy is particularly advantageous for companies that are in that position and wary of taking on too much debt, Mr. Coury said.

Unlike traditional wholesale arrangements, Claire's store-in-store partnerships involve installing its own branding and fixtures, selecting products for sale and sending its employees to set up, stock and restock its store-in-stores. Claire's shares in the revenue generated by sales of its products, Chief Executive Ryan Vero said.

"It's worked extremely well for us when we're managing the environment in partner locations," he said.

Claire's filed for chapter 11 in the U.S. in 2018 due to a debt burden that at one point reached $2 billion, Mr. Vero said. The company exited bankruptcy several months later with new owners and now carries roughly $500 million in debt, said Mr. Vero, who took the helm in 2019.

Since emerging from bankruptcy, the traditionally mall-based Claire's has closed stores in struggling malls and opened in lifestyle and strip centers. The company has also ramped up its partnerships and now has agreements with more than 30 retailers including Walmart Inc. and CVS Health Corp., Mr. Vero said. The company filed paperwork for an initial public offering in September 2021, but that process is on hold due to the market's current volatility, he said.

Macy's has a similar store-in-store arrangement with jewelry company Pandora A/S that has grown from five store-in-stores to 28 over the past year, said Nata Dvir, chief merchandising officer for Macy's.

Macy's announced in early 2020 that it planned to close 125 stores over three years and exit struggling malls. Since then, the retailer has been opening smaller locations in shopping centers, ramping up spending on its digital platform and adding dozens of new off-price stores called Backstage, largely inside its department stores.

Macy's expects to announce in January fewer than 10 new closures, Chief Financial Officer Adrian Mitchell told investors earlier this month.

Toys "R" Us joined with Macy's as a way to return to U.S. bricks-and-mortar stores quickly and at a national scale, said Yehuda Shmidman, chief executive of WHP Global, which bought a controlling stake in parent company Tru Kids Inc. last year. The toy retailer closed all of its U.S. stores after filing for bankruptcy in 2017.

Question: "Our mission was very simple: How do we remove the brand from the bad business and then scale it fast?" said Mr. Shmidman, who described the partnership with Macy's as similar to a franchising agreement. "Partner or perish."