Macy's, Inc. Slows Its Pace of Store Closures

During the past few years, Macy's (NYSE: M) has closed numerous stores in response to sliding sales. The company shuttered about 40 locations in 2016 and more than 60 in early 2017.

However, Macy's is finally poised to snap an 11-quarter streak of comp sales declines in the fourth quarter of fiscal 2017. With sales trends stabilizing, the company doesn't need to keep culling its store portfolio at an accelerated pace. Sure enough, Macy's announced last week that it plans to close just 11 stores in 2018.

Where is Macy's closing stores?

All of the Macy's store closures announced last week will occur during the first quarter of fiscal 2018. Four of the locations are in California: full-line stores in San Francisco, Los Angeles, and Laguna Hills, plus a furniture store in Novato. Another two are in Florida -- one in Gainesville and one in Miami.

The other five stores that are closing are in Twin Falls, Idaho; Terre Haute, Ind.; Fort Gratiot Township, Mich.; Cincinnati; and Burlington, Vt.

Three big themes

One theme that immediately jumps out based on the list of 2018 Macy's store closures is that the company is pulling out of smaller markets. The Gainesville, Twin Falls, Terre Haute, Fort Gratiot, and Burlington locations all fall into this category. Each of these stores is the only Macy's for at least 40 miles. In some cases, the nearest Macy's is more than 100 miles away.

That means that Macy's can't expect to retain sales from these markets in other stores or online. When the only Macy's store in a region closes, online sales usually decline there, according to company CFO Karen Hoguet. Apparently, Macy's doesn't see enough potential in these smaller cities to justify maintaining a presence there.

A second theme is that Macy's is cashing in on valuable real estate in major cities. The stores that are closing in San Francisco and Los Angeles were sold by the company a year ago, fetching $41 million and $50 million, respectively. Both locations have other Macy's stores nearby. Given the buoyant state of the California real estate market, it made sense to shift to a smaller real estate footprint in San Francisco and Los Angeles.

The third theme is that the company continues to close some stores with expiring leases. For example, in Miami, Macy's and its predecessor Burdines operated a downtown store for a century. However, with its below-market lease set to expire this year, Macy's decided to close up shop. Several of the other stores set to close -- those in Laguna Hills, Novato, Twin Falls, and Cincinnati -- were also leased locations.

Looking ahead

In mid-2016, Macy's announced that it would close about 100 stores over the next few years. Including the current round of store closures, Macy's is about 80% of the way to that target.

Two more stores set to close within the next couple of years are the Macy's men's store in downtown San Francisco and the Macy's store at Tysons Galleria in McLean, Va. Like the Los Angeles and San Francisco stores closing this year, both of these valuable properties were sold by Macy's in late 2016/early 2017 and leased back temporarily.

Malls where Macy's currently operates two (or even three) stores could also be candidates for store closures. Many of the malls with multiple Macy's stores are prime real estate, giving the company a big incentive to consolidate into a smaller footprint. In addition, Macy's will undoubtedly close more stores with expiring leases in the coming years.

Even after Macy's reaches its target of closing 100 stores, it will probably continue trimming its portfolio gradually. However, Macy's doesn't seem likely to repeat the mass store closures of the past two years anytime soon.

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Adam Levine-Weinberg owns shares of Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.