On September 8, national department store chain Macy's (NYSE:M) announced that it would be closing a whopping 35-40 underperforming stores by early 2016 as the company "... works to optimize its omnichannel approach to customers across America." I was taken aback by this move -- but not for the reason you might think.

I was surprised not because its peers, J.C. Penney (NYSE:JCP) and Sears Holdings (NASDAQ:SHLD), too, have been shedding stores (albeit amid poor operating results). Or because the number of American shopping malls in operation continues to decline slowly, all while mall vacancy rates continue to creep up. No, I was shocked by the sheer brilliance of the move, and the position of strength from which it was made. Here's why.

Everyone wants to be Macy's
Anyone who's been paying attention to the retail sector over the last six years has no doubt noticed that it has been feast or famine. The likes of J.C. Penney and Sears have struggled mightily, while a chosen few, such as Macy's, have generated exceptional returns for their shareholders.

Sears Holding Corp.

 

FY 2012

FY 2013

FY 2014

Revenue

$39,854 mil.

$36,188 mil.

$31,198 mil.

GAAP Net Income

($930 mil.)

($1,365 mil.)

($1,682 mil.)

Free Cash Flow

($681 mil.)

($1,438 mil.)

($1,657 mil.)

Store Count

2,548

2,429

1,725

Source: S&P Capital IQ.

J.C. Penney Company 

 

FY 2012

FY 2013

FY 2014

Revenue

$12,985 mil.

$11,859 mil.

$12,257 mil.

GAAP Net Income

($985 mil.)

($1,388 mil.)

($771 mil.)

Free Cash Flow

(820 mil.)

($2,765 mil.)

(13 mil.)

Store Count

1,114

1,104

1,062

Source: S&P Capital IQ.

Macy's 

 

FY 2012

FY 2013

FY 2014

Revenue

$27,686 mil.

$27,931 mil.

$28,105 mil.

GAAP Net Income

$1,335 mil.

$1,486 mil.

$1,526 mil.

Free Cash Flow

$1,481 mil.

$1,942 mil.

$1,939 mil.

Store Count

843

842

841

Source: S&P Capital IQ.

Reflect on the above data for a moment. Macy's, which produces GAAP profits and billions in free cash flow for its owners each and every year, is choosing of its own volition to follow its troubled peers Sears and J.C. Penney in closing stores. True, Macy's isn't closing as many stores as Sears Holdings, but the fact itself is interesting. Fortunately for Macy's shareholders, the move is being made for one extremely good reason. 

Macy's strategy going forward
As my fellow Foolish writer Adam Levine-Weinberg noted earlier this year, Macy's strategy for the foreseeable future revolves around a blending of physical stores working in tandem with various e-commerce initiatives -- described by management as its "omnichannel" strategy. According to the company's own financial filings:

The Company's omnichannel strategy allows customers to shop seamlessly in stores and online, via computers or mobile devices. A pivotal part of the omnichannel strategy is the Company's ability to allow associates in any store to sell a product that may be unavailable locally by shipping merchandise from other stores or customer fulfillment centers to the customer's door. Likewise, the Company's customer fulfillment centers can draw on store inventories nationwide to fill orders that originate online, via computers or mobile devices. Since May 2014, nearly all Macy's and Bloomingdale's stores have been fulfilling orders from other stores and/or online for shipment, compared to 500 Macy's stores as of February 1, 2014. Since August 2014, nearly all Macy's and Bloomingdale's stores have been fulfilling orders for store pick-up related to online purchases. Starting November 1, 2014, same-day delivery pilots were tested in eight Macy's markets and four Bloomingdale's markets and in 2015 same-day delivery will be expanded to additional markets. -- Macy's Form 10-K

This forward-thinking strategy by Macy's management team will one day likely make for a spectacular case study at Harvard Business School, but for now we are left to watch as Macy's teaches its peers a masters-level class on just how a department store can thrive in the 21st century.

Not only will Macy's remaining stores function as traditional department stores for the everyday needs of the consumer, but as the front end of a distribution chain that starts with that same consumer's computer or mobile phone.

With this in mind, the company has begun building a number of massive, technologically advanced direct-to-consumer distribution facilities (such as a $170 million, 1.3 million square foot facility opened by Macy's last year just north of Tulsa, Oklahoma) that rival Amazon.com's own warehouses in size and scope.

All of this is being accomplished while Macy's seeks new growth markets. It is seeking a foothold in China, for example, via its recently announced e-commerce-focused joint venture with Hong Kong-based Fung Retailing Limited.

Bottom line: Macy's may be closing stores, but it isn't retreating in absolute square footage devoted to fulfilling the needs of its customers. 

Three cheers for Macy's management
Macy's management has consistently generated stratospheric returns on equity (averaging 22.24% over the last five years), free cash flow last year of just under $2 billion, all while its comparable peers have bled red ink all over their SEC filings. Macy's management team, led by CEO Terry Lundgren, is bobbing and weaving in what amounts to a treacherous 21st century retail environment. Shoppers today aren't shopping the way they did 50 years ago -- it's just that simple.

All the better, Wall Street doesn't appear to fully appreciate Macy's strategic superiority, awarding the company a forward P/E ratio of just 13 according to S&P Capital IQ estimates. I've added Macy's shares to my Foolish watch list, and I urge other Foolish investors to do the same. The move to close 40 stores by early 2016 is dazzling for the simple fact that it focuses on the future whereas peers appear to be focused on the past. 

Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.