In August 2016, Macy's (M 1.41%) announced that it would close approximately 100 stores across the U.S. in an accelerated fashion -- with most of the closures occurring the following year. Sure enough, Macy's shuttered 63 stores in early 2017.
Since then, Macy's has closed approximately 30 additional stores as leases expired or properties were sold. That lined up almost exactly with what the company had said it would do in order to complete the right-sizing of its store portfolio.
Unfortunately, following a rebound in sales and earnings trends that began in late 2017, Macy's has come under renewed pressure over the past year. As a result, the pace of store closures is set to accelerate again in 2020. In fact, Macy's has already confirmed plans to close more than two dozen stores this year, which will bring its cumulative total since mid-2016 to well beyond the original target of 100.
Macy's needs to keep slimming down
Macy's returned to sales growth in the final quarter of 2017, following 11 consecutive quarterly declines. Its momentum continued in the first three quarters of fiscal 2018 as comparable-store sales rose 2.7% year over year. That allowed the company to post strong earnings growth.
However, comp sales growth slowed to just 0.7% in the fourth quarter of fiscal 2018. This trend continued in the first half of fiscal 2019. That -- along with poor merchandise planning decisions -- led to a sharp drop in Macy's profitability. In the third quarter, Macy's tried to pull back on discounting to protect its margins, but that contributed to a 3.5% comp sales decline.
On Macy's Q3 earnings call, management acknowledged that rapidly deteriorating sales trends at lower-tier malls contributed to the weak result. Macy's has tried to keep many of these stores open despite falling sales and profitability to serve as convenient hubs for online order pickup and returns. Yet in most cases, it has been fighting a losing battle, as consumers have migrated to other physical and digital shopping venues. In short, another big round of store closures has become necessary.
Closing overlapping stores
First, Macy's will continue to shrink its store count in markets where it has multiple locations. In today's retail world, it makes more sense for the chain to focus its efforts on the best malls in each region.
Within this category, Macy's plans to close stores in the Akron, Ohio; Atlanta, Chicago, Cincinnati, Harrisburg, Pennsylvania; Kansas City, Miami, Nashville, Orlando, Seattle, Piedmont Triad, and central Connecticut regions. Three store closures had been announced previously: a pair of furniture galleries in the Chicago suburbs that were sold for $26 million -- the furniture sections will be moved into massive nearby Macy's stores -- and the retailer's downtown Seattle store, which will be sold.
Most of the other 11 stores in this group sit on real estate owned by the company. Macy's will likely try to sell the real estate quickly (provided it can get decent prices), generating cash that it can use to continue paying down debt and funding investments in the business.
Exiting small markets
An even more striking aspect of Macy's 2020 store closure program is that it is set to pull back dramatically in small markets. Stores in Vero Beach, Florida; Macon, Georgia; Lewiston, Idaho; Carbondale, Illinois; Muncie, Indiana; Owensboro, Kentucky; Leominster, Massachusetts; Salisbury, Maryland; Helena, Montana; St. Clairsville, Ohio; State College, Pennsylvania; Burlington, Washington; and Walla Walla, Washington are all set to close.
For the most part, these are small cities with fewer than 150,000 residents in the metro area. In the era before e-commerce, even these small cities could sometimes support department stores, as there was minimal retail competition. However, residents of these cities now have abundant (online) shopping options. As a result, in-store sales are falling at many of these small-city Macy's locations.
These stores don't generate enough sales or profit to justify major investments that might turn the tide. Their steady downward trend in performance means it's no longer economically viable to keep these stores open just to serve Macy's e-commerce business.
Expect more store closures ahead
None of the Macy's store closures revealed this week are especially surprising. The stores that are closing aren't located in high-performing malls, haven't received major investments recently, and don't serve a vital purpose for Macy's.
While closing two dozen stores is a good start, there's a lot more work to do for this iconic department store chain. There are more than 600 Macy's stores in the U.S. today (including home and furniture stores), and there aren't nearly that many high-quality malls. Macy's is likely to continue trimming its store count in the years ahead. Management may have more to say about its specific plans at the company's upcoming investor day next month.