Macy's Move to Close Stores May Be Necessary, but It's Not a Quick Fix

The major cuts Macy's announced this week—closing 125 stores over the next three years, as well as cutting 2,000 jobs as part of a larger plan to save hundreds of millions of dollars—may be a necessary move for the company, but it still may not be enough. In addition to the aforementioned cost cutting measures, the retailer is also shelving half of its 36 shops for the rotating retail concept Story, which was reported on Thursday. The store-within-a-store business was launched in Macy's locations less than a year ago (the department store purchased the business in 2018). “This was inevitable," said Sucharita Kodali, a principal retail analyst at Forrester. "Only 150 stores generate half of revenue. The bottom 20% weren’t carrying their weight, so this is much, much better." According to Placer.ai’s vp of marketing, Ethan Chernofsky, the narrative around closures is "one of doom and gloom," given the focus on underperforming locations. However, the coming changes speak to a desire to adapt to a new climate. “The ability to better position a fleet of brick-and-mortar stores can provide an amazing foundation for a retailer to retool and, ultimately, rebound,” he wrote in a report. "Macy’s realizes that it needs to close stores in order to optimize its retail footprint. And so far, it seems like the chain is identifying the right stores to close." The question of whether the strategy will work remains unanswered, he added. On paper, the plan appears sound. But in reality, few—if any—retailers have succeeded breathing life into their businesses by following a similar path. Pouring some doubt on the strategy, Fitch Ratings on Wednesday downgraded Macy’s by one notch to BBB- from BBB. The credit rating agency said the move was largely because of the department store operator's prolonged inability to stabilize cash flow. "The truth is that it is far easier to name brands that closed stores merely as an intermediate step on their way to oblivion," wrote Steve Dennis, president of SageBerry Consulting, in a recent opinion column. "The retail graveyard is chock-a-block with once mighty merchants that spent years closing stores only to eventually succumb to the inevitable." In an email, Dennis added: “The central problem is you've made it more difficult for customers to shop from you, and you won't make that up online and/or from transfer to another store [in many cases].” Notably, Macy’s will lose another $1.4 billion in revenue from the shuttering of stores, and perhaps more if those closures reverberate to other stores and online. That’s because stores can have a halo effect for both ecommerce and other locations, as a larger fleet makes it easier for customers to pick up and return goods regardless of where they may be located. According to a report by Thinknum Media, Facebook selfie and status updates at the retailer’s stores jumped by about 72,400 during the holiday season, a decline of roughly 46% compared to 135,000 for 2018. Those numbers, in turn, are well below the 272,000 recorded in 2017, indicating troubles in Macy’s fleet of stores. The lower number of Facebook status updates for Macy's is likely to be reflected in the company’s next earnings report. Many elements of the strategy are not new, as Macy's has been closing stores, but the company now has a definitive list of locations, said Melissa Gonzalez, CEO and retail strategist at The Lionesque Group. By trimming what’s not working, Macy's can focus resources and reinvest in experimentation, Gonzalez said. "Department stores need to be their own town center," she said, suggesting that stores must offer a smorgasbord of different services and experiences. In that vein, Kodali offered up some advice of her own, suggesting that in-store ads are a path forward for Macy's. She said Market by Macy’s and b8ta specifically are steps in that direction, but added that the retailer needs a dedicated ad sales team. Indeed, in Macy’s favor is a decent balance sheet and valuable real estate, although its cash and cash equivalents have shrunk over the past year. At the end of the third quarter, Macy’s had about $300 million in cash versus nearly $1.2 billion for the same period a year prior. Long-term debt, meanwhile, is fairly stable at close to $4.7 billion year-over-year. Note that in early December, Macy’s offered to use cash to purchase $450 million of its long-term debt.