Macy’s Fix for Department Store Woes: Fewer Stores – Wall Street Journal

Macy’s has been evaluating its real estate since it came under attack by activist investor Starboard Value last year.
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Macy’s Inc.
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said it would close 100 stores, admitting that some locations were worth more as real estate than retail outlets as shoppers continue to spend more online and at discount chains.

The decision to shrink its footprint by 14% came as Macy’s and rival Kohl’s Corp.
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reported falling sales and lower shopper visits for the June quarter. Kohl’s also cut its profit target for the year.

The results, however, were better than anticipated, and investors—encouraged that some of the overcapacity is starting to exit the department store space—pushed the stock of major chains higher.


Macy’s shares jumped 17% to $39.83 in Thursday afternoon trading, while Kohl’s shares climbed 16% to $43.88. The stocks had lost half and a third of their value, respectively, in the previous 12 months. J.C. Penney Co.
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, which reports results Friday, gained 9% to $9.94.

“We believe there is too much retail square footage in the department store space,” Macy’s President Jeff Gennette, who will take over as CEO next year, said in an interview.

The retailer has been evaluating its real estate since it came under attack by activist investor Starboard Value LP last year. Macy’s executives said they haven’t finalized which of the company’s 728 locations they will close; and they will continue to operate most of the stores through the end of the fiscal year.

“Most of these stores are underperformers or in weak locations” but the company also will close a few locations because “desirability as a redevelopment opportunity exceeds their value to us as a retail store,” Macy’s finance chief, Karen Hoguet, told analysts Thursday.

The closures will free up $1 billion in sales that will be up for grabs by Macy’s competitors, though Macy’s executives said they would seek to recapture some of that business at neighboring locations or through its digital operations.

“Although this is partly a reaction to being in a tough competitive position within the landscape, they are being more offensive than most,” wrote Citi analyst Paul Lejuez in a note to clients. “It is not only good for [Macy’s] but also for the industry.”

Real-estate research firm Green Street Advisors estimates that department stores need to shutter roughly 800 locations, or about a fifth of all mall anchor space, to regain the sales productivity they had a decade ago.

While chains including Macy’s, Kohl’s and Penney have closed hundreds of stores in recent years, the culling hasn’t been fast enough to offset persistent sales declines. Others also have moved to shrink, with chains such as Office Depot Inc.,
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Sports Authority Inc. and Wal-Mart Stores Inc.
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announcing hundreds of closures this year.

Kohl’s executives said Thursday they have no plans to close additional stores beyond the 18 locations closed in the latest quarter, which left it with a store count of 1,150.

“Fewer stores generally are not going to be a ticket to success in our mind,” Kevin Mansell, Kohl’s chairman and CEO, told analysts on a conference call. “We monitor stores all the time, but there are no stores that we would anticipate closing next year right now.”

Mr. Mansell said having a broad network of brick-and-mortar locations is “a big advantage” that can help drive online sales and serve as shipping locations. He said 21% of e-commerce sales in the June quarter came from customers who ordered online and picked up at a physical store.

Mr. Mansell said his company hasn’t seen much benefit from recent closures by Macy’s, which shut 41 stores earlier this year. “I would think the mall-based retailers would see more of that,” he said.

After the 100 closures, Macy’s would have about 628 locations, and Macy’s CEO Terry Lundgren said he doesn’t foresee the chain, which was built over the years by combining local brands such as Bullock’s, Stern’s and Marshall Field’s, getting much smaller.

The closures, as well as other asset sales such as the potential divestiture of its men’s store in the Union Square section of San Francisco, will free up capital that Macy’s plans to invest in its remaining stores by upgrading the merchandise, adding sales staff and improving technology.

Some loyal Macy’s shoppers were upset at the news that the company was closing more stores, but said they weren’t surprised.

“They really need to bring us in here and use us as consultants,” said Ella Eskridge, who works at a jewelry store and was shopping at a Macy’s in Atlanta.

One of the biggest complaints was the clutter. The store at Lenox Square mall has expansive sale sections that both lure and frustrate bargain hunters. “There’s no rhyme or reason,” Ms. Eskridge said, as she thumbed through a rack of clothing that had intermixed sizes, colors and styles.

Other shoppers complained about the quality of Macy’s merchandise.

“The quality is getting lower and lower,” said Aileen Antonier, 59 of Los Angeles, who was visiting the Herald Square flagship in New York City. “I kind of see it as a Macy’s problem,” she said, noting better quality at rival chains such as Lord & Taylor.

Macy’s sales fell 3.9% to $5.87 billion in the three months to July 30. Sales at existing stores including licensed departments fell 2%. Ms. Hoguet, however, said she was encouraged by improved apparel sales, a strong start to the back-to-school shopping season and a moderation in the falloff in spending by tourists.

Net income fell to $11 million, compared with $217 million a year earlier. The company took a $249 million charge in the current period for the store closures.

At Kohl’s, sales fell 2% to $4.18 billion in the same period. Sales at existing stores were down 1.8%. Net income edged up to $140 million from $130 million a year earlier.

Mr. Mansell, the Kohl’s CEO, said Amazon.com Inc.
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and off-price retailers such as TJ Maxx and Marshalls were continuing to gain share.

“We are really focused on making changes to our business model that will allow us to compete more effectively,” he said, noting that rolling out more smaller stores could be an option down the road. “We all feel like stores are a really important part of our future and we just have to make them work harder for us.”

Write to Suzanne Kapner at Suzanne.Kapner@wsj.com

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