Macy's (NYSE:M) knows it needs to dramatically cut its spending.

The department store chain, which has struggled to find the right balance of brick-and-mortar locations and e-commerce growth, has unveiled a new three-year plan designed to stabilize its finances. At the core of the strategy are moves to reset its fixed costs in ways that will deliver a savings of more $1.5 billion annually by 2022, with $600 million in gross cost savings coming by 2020, according to a press release.

The exterior of a Macy's.

Macy's is closing 125 locations and making other deep cuts. Image source: Macy's.

How is Macy's saving $1.5 billion a year?

To save $1.5 billion a year, the department store chain plans massive cuts to its retail store base. The chain will close 125 locations in lower-tier malls and shut down a tech center in San Franciso.

"We will focus our resources on the healthy parts of our business, directly address the unhealthy parts of the business and explore new revenue streams," said CEO Jeff Gennette in the press release. "Over the past three years, we have shown we can grow the top-line; however, we have significant work to do to improve the bottom-line."

Basically, Macy's has decided that it can't grow its way back to success. It needs to cut costs, walk away from failing malls, and simply spend less money.

It's not all about reducing costs

Macy's isn't just making cuts. The company intends to expand its discount chains Backstage and Bloomingdale's The Outlet. The plan is to add Backstage to 50 existing Macy's stores and open seven free-standing locations. It's also testing a smaller format store, Macy's Marketplace, that would be located in lifestyle centers rather than malls.

About 2,000 people will lose their jobs due to the changes, though some employees may move to other open positions. This is Macy's showing investors that it has a plan, and that plan is going to be painful -- but that a stronger company could emerge from it.