Under its new leadership, iconic retailer Macy's is mounting its second major turnaround effort in four years by planning to close about 150 namesake stores, accelerating the expansion of its luxury chains, and generating as much as $750 million from selling properties.
The New York-based store operator's CEO, Tony Spring, unveiled the strategy during a call Tuesday to discuss its fourth-quarter earnings after taking over the retailer this month. His plan calls for focusing investment on roughly 350 stores that remain after shutting the 150, about a third of which will close this year and the rest through 2026.
"We have to focus on making sure that we have the best stores, not the largest number of stores," Spring told Wall Street analysts.
The shifts by a high-profile chain founded as a department store in the early part of the 20th century reflect the changing nature of retailing in recent decades as online shopping with rapid deliveries and the addition of lower-cost competitors creates new challenges and opportunities.
As part of its initiative to focus on its best-performing stores, Macy's plans to "monetize" $600 million to $750 million of assets through 2026 "primarily related to stores and distribution center closures," according to an investor presentation, including streamlining its supply-chain network. Macy's actually owns, rather than leases, many of its anchor stores at malls, so locations slated for closing could presumably go on the block.
The new CEO wasted no time putting his mark on Macy's. He became the CEO of the company — which includes not only its namesake department stores but upscale Bloomingdale's and beauty purveyor Bluemercury — by succeeding Jeff Gennette. Spring was CEO of Bloomingdale's before being promoted to head parent company Macy's. His new strategy includes faster growth in luxury retail and in small-format stores, for both Macy's and Bloomingdale's.
"They are leaning into what is working, expanding both their luxury and small-format brands, while accelerating the shuttering of the underperforming money pits," Brandon Svec, national director of U.S. retail analytics for CoStar Group, said in an email.
Retailer Facing a Crucial Juncture
Spring is taking the helm at a critical time for Macy's, whose namesake department store chain is part of a retail sector that's been badly battered amid changes in consumer habits, with customers being more cost-conscious amid inflation, shopping online and flocking to discount and off-price stores.
Spring has the added challenge of dealing with a dissident shareholder group, Arkhouse Management and Brigade Capital Management, whose takeover effort to take Macy's private was rejected last year. Arkhouse now has nominated nine directors for Macy's board and is widely expected to sell off some of Macy's real estate holdings if it gains control of the company.
Arkhouse declined to comment Tuesday on Macy's plans.
"The sharks were circling and Macy’s leadership had to do something to appease investors," Svec said. "The initial reaction from the Street was positive, with the stock being up nearly 5% [Tuesday] morning. ... The big question now is whether this placates the masses and gives management more time to execute the brand’s repositioning or elicits a higher buyout offer from those looking to take Macy’s private."
On the earnings call, Spring said he sees an opportunity for the parent company in the luxury sector, where he has experience.
Macy’s said it "plans to take advantage of its leadership position in the luxury market, where Bloomingdale’s and Bluemercury have been outperformers within the Macy’s Inc. portfolio and across the broader luxury landscape, by further growing its store fleet and digital presence." As part of that strategy, about 15 Bloomingdale’s nameplate stores and at least 30 new Bluemercury stores, along with roughly 30 Bluemercury remodels, are slated to open in new and existing markets over the next three years.
As for the core chain, Macy's did a careful analysis — "center by center, market by market" — over the past 10 months to decide which stores it should close, according to Spring.
'Non-Go-Forward' Stores
"Our thresholds to keep a store open have become more stringent," he said. "In the past, we may have continued operating an under-productive store that was four-wall, cash-flow positive. The bar has now been raised."
It determined that the 150 "non-go-forward" locations represented about 25% of Macy’s Inc.'s gross square footage but less than 10% of its sales.
Macy's is looking to sell its flagship in San Francisco's Union Square neighborhood, Mayor London Breed told the San Francisco Chronicle on Tuesday.
"This highlights just how inefficient some of these larger department stores are relative to the rest of the fleet," Svec said.
From this year to 2026, in a footnote in its investor presentation, Macy's said it expects asset-sale gains of $250 million to $365 million for "non-go-forward" stores and distribution centers slated for closing. "Within this, expect asset-sale proceeds of $500 million to $650 million and asset-sale gains of $250 million to $350 million for non-go-forward stores," according to the retailer. Additionally, the company said it has generated over $2.4 billion of "real estate "monetization proceeds" from fiscal 2015 through fiscal 2023.
The company also said it will proceed with its plan to debut up to 30 more small-format Macy's stores through 2025.
"The expansion of the small-format Market by Macy’s stores highlights how successful the strategy has been thus far and how important it is for Macy’s to maintain a physical presence within a market," Svec said. "Their investor presentation specifically highlights that over 80% of digital sales comes from markets with physical stores."
Will Latest Turnaround Strategy Succeed?
Neil Saunders, managing director of GlobalData, in a note to clients Tuesday, welcomed Macy's turnaround plan but said it will be difficult to make it work.
"The plan to reinvigorate the Macy’s banner is long overdue and the recognition that something needs to change is to be warmly welcomed," he said. "Under previous CEOs the problems were all too often swept under the rug, so even noting that change is needed is a step in the right direction. However, this will also be the most challenging part of the plans. It will be a long, hard slog to stop and reverse all the rot that has infected the Macy’s brand over many, many years."
Macy's declined to comment specifically on Saunders' take.
The retailer has been reducing its store fleet for several years now as part of its previous "Polaris" turnaround effort, which Gennette unveiled in February 2020. That strategy, similar to "A Bold New Chapter," sought to reposition the company's real estate portfolio and called for the closing of 125 stores.
As part of its "new chapter," Macy's plans to expand Bloomingdale’s footprint beyond its current locations in 14 of the 50 largest markets, according to Spring.
"Today Bloomingdale's current foothold is predominantly coastal," he said. "The adage that fashion trends begin in L.A., New York or Miami and then migrate no longer holds true. With the rapid growth of social media and recent population shifts the fashion playing field has leveled and psychographics have moved," he said, referring to a marketing research strategy that determines why a consumer might be interested in a retailer's goods or services.
Macy's will accelerate the roll-out of its small-format Bloomie's and the chain's outlets, with 15 of them planned in the next three years, Spring said.
"The Bloomingdale’s expansion can work as there are several strong luxury markets where the chain is not represented," Saunders said. "However, given the current slowdown in the luxury market and the push by high-end brands to sell more via the direct-to-consumer route, we believe this strategy comes with risks attached."
Mall-Based Company Seeks a Balance
The small-format Macy's and the small-format Bloomingdale's, called Bloomie's, have generally been in off-mall locations. But that doesn't mean that the retailer is abandoning malls, according to Spring, but rather that it's seeking a balance.
"Yes, we want to have both strong on-mall presence, some of the best stores in the country," Springer said. "We want to also pursue off-mall to make sure that we have availability and convenience and where a lot of footsteps are going today. But we're going to remain a majority mall-based, freestanding-store company with the right complement of off-mall stores to make Macy's and Bloomingdale's more convenient."
But having fewer Macy’s as mall anchors will have an impact on those retail centers, according to Svec.
“The net result for retail space markets will be a continuation of the same have and have not trends witnessed over the better part of the last decade, as demand increases for mid-sized shopping center space while underperforming malls lose another major source of foot traffic,” he said.
In the fourth quarter, Macy’s net sales were $8.1 billion, down 1.7% compared with the prior-year period, even though there was an additional week versus last year.
“When the extra week is factored out, we estimate that the overall sales slump was more around the 8% mark,” Saunders said. “This is not a good result. In comparable terms, sales declined by 5.4% and did so off the back of a 3.1% decline in the prior year.”
In the quarter Macy's posted a $71 million loss compared with $508 million in net income. That included a $1 billion charge for impairment and restructuring.