What happened

Shares of department store stocks were climbing broadly today after Macy's (NYSE:M) unveiled a three-year turnaround strategy at its investor day conference this morning. Its plans include closing 125 underperforming stores in malls, building four in-house $1 billion brands, cutting staff, and establishing a single corporate headquarters in New York City. The company also issued guidance for fiscal 2020 and targets for fiscal 2022.

The stock gained over the course of the trading session, and the market seemed to warm to the turnaround plan, which helped lift the broader retail sector. Among today's winners were Kohl's (NYSE:KSS) and Nordstrom (NYSE:JWN), which closed up 6.6% and 5.6%, respectively, and the S&P SPDR Retail ETF (NYSEMKT:XRT), which also gained 2.3%. Macy's itself finished up 6.0%.

The venerable department store chain is still seen as a bellwether in the industry, despite its ongoing challenges, so optimism for its recovery sparked a broader bullishness for other beaten-down department store stocks.

The interior of a department store

Image source: Getty Images.

So what

In a far-reaching plan, Macy's said it would:

  • Reset its fixed cost base to deliver annual cost savings of $1.5 billion by 2022 and $600 million this year. That will include reducing its corporate and support staff by 9%, or about 2,000 positions.
  • Optimize its store portfolio by investing in top-performing stores and shuttering underperforming stores in lower-tier malls. 
  • Launch the next phase of its Star Rewards program.
  • Curate quality fashion by developing more in-house brands.
  • Accelerate digital growth by moving the Macys.com headquarters from San Francisco to New York where it can better coordinate with the company's brand partners. Macy's will also expand its tech team, based in the Atlanta area.
  • Expanding its off-price brands, Backstage and Bloomingdale's The Outlet.
  • Testing a new store format called Market by Macy's, which has a smaller footprint and will be located in mixed-use developments. The stores will stock Macy's merchandise as well as local goods.
  • Modernizing its supply chain, including improving its fulfillment network to increase sell-through and lower markdowns.

In addition, Macy's said it expected earnings per share for fiscal 2019 would be near the upper end of its previous guidance range of $2.57 to $2.77. It also reported a comparable-sales decline of 0.5% on an owned-plus-licensed basis, slightly better than the 0.6% drop it reported for November and December.

For 2020, the company expects comps to fall between decline 2.5% to 1.5% and forecasts earnings per share of $2.45 to $2.65 as it anticipates continued challenges in mall-based retail as well as disruptions from the implementation of its new strategy, which it calls Polaris. In fiscal 2022, it's aiming for earnings per share of $2.50 to $3.00, though it also sees comparable sales down 1% to flat that year.

Macy's management seems to understand the challenges as their targets for 2022 aren't particularly bold, yet it was enough to get some goodwill from investors. It doesn't hurt that Macy's stock is dirt cheap according to conventional valuations, as are many of its peers.

Kohl's and Nordstrom are competitors with Macy's, of course, but these stocks often trade in tandem as brick-and-mortar retailers like department store chains face the same threats. If Macy's can figure out a way to adapt and grow in this challenging environment, then that gives hope for other department stores operators like Kohl's and Nordstrom. 

Notably, other struggling retailers like Gap also gained today.

Now what

Investors should expect retail stocks to continue to be volatile through February as most of these companies are set to report results for the key holiday quarter later this month. Macy's will open its books on Feb. 25, though the company eliminated much of the suspense by presenting preliminary numbers in its growth plan. 

Though retail stocks are celebrating today, those earnings reports will likely take precedence over any hopes for a long-term turnaround in the sector. Stay tuned.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.