Nearly a year ago, Macy's (NYSE:M) announced that it would close approximately 125 less-productive stores within three years. The goal was to amplify the company's focus on its best stores and its fast-growing e-commerce business. Macy's only closed about 30 stores in the first half of its 2020 fiscal year, though.

On Wednesday, the department store operator unveiled the next step in its multiyear downsizing strategy. Let's take a look at where and why Macy's is closing stores now.

The exterior of a Macy's store

Image source: Macy's.

More stores closing in 2021

In addition to the store closures that Macy's announced in early 2020, the company closed its store at Tucson's Park Place mall and a furniture clearance store in Columbus, Ohio last summer. The company also completed several store consolidations -- closing freestanding men's or furniture stores and moving those departments into an adjacent full-line store -- around the same time. Prior to the holiday season, Macy's converted two stores into fulfillment centers. Those locations still allow order pickup, returns, and other services, but no longer have in-store shopping.

Macy's also confirmed several store closures toward the end of 2020. It announced that stores in Lima, Ohio and Portland, Oregon would close in early 2021. Meanwhile, it quietly closed stores in Cambridge, Massachusetts and Winter Haven, Florida right after Christmas.

This week's announcement added 30 more Macy's locations and one Bloomingdale's store to the list of closings. There are two main themes to the closures: small-market stores and secondary locations in major metro areas.

Exiting more small cities

Macy's 2020 store closures included exiting a number of small and midsize markets. That trend will continue in 2021. The store closures on tap for this year include Macy's only stores in the Waterbury, Connecticut; New London, Connecticut; Port Charlotte, Florida; Daytona Beach, Florida; Idaho Falls, Idaho; Bloomington, Indiana; Cape Girardeau, Missouri; Joplin, Missouri; Utica, New York; Lima, Ohio; Mansfield, Ohio; Jackson, Tennessee; and College Station, Texas regions.

Some of these stores are within a reasonable driving distance from other Macy's locations. But by and large, Macy's is likely to lose customers as it pulls out of these small and midsize cities. (The company has typically found that when it closes the only store in a market, its e-commerce business in the area loses ground.) However, walking away from that business could be the right move. The sales opportunity in these markets may not be big enough to justify the investments Macy's would need to make to stay competitive there.

Culling the store base in big metro areas

Macy's has a much stronger market position in big urban areas. Yet some of its stores are doing a lot better than others. Stores in low-productivity malls have experienced particularly severe traffic declines in recent years. The department store giant is closing those locations in order to drive more traffic to higher-performing stores, particularly those that it has upgraded in recent years as part of its "Growth 150" plan.

This week's list of store closures includes locations in the Phoenix, San Diego, San Francisco, Atlanta, Chicago, Kansas City, New York, Cleveland, Cincinnati, Washington, D.C., Portland, Memphis, Salt Lake City, and Seattle metro areas. It also includes two each in the Dallas-Fort Worth and San Antonio metro areas. The vast majority of these stores are within an easy drive of at least one other full-line Macy's.

An opportunity to sell more real estate

Last February, Macy's estimated that it would monetize approximately $700 million of real estate between fiscal 2020 and fiscal 2022. So far, it has only captured a fraction of that opportunity, but the latest round of store closures will allow Macy's to make more progress toward that target.

The company owns more than a dozen of the stores it is closing in 2021. Even small-market stores can have value, as they typically sit on large land parcels. For example, Macy's recently sold the Lima, Ohio store that is closing soon for $3 million. Moreover, the 2021 store closing list includes owned locations in several major metro areas, including Phoenix, San Diego, Washington, D.C., and Dallas-Fort Worth.

Closing underperforming stores should help Macy's rebuild its profitability over the next couple of years. And by selling the stores that it owns, it will be able to reduce its debt load. The legendary department store still faces a long road back to health, but these store closures represent a step in the right direction.

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